December 17, 2007
With 2007 coming to a close, Grant Thornton LLP offers the following last-minute tax planning tips:
1. Accelerate deductions and defer income. Generally, it is advantageous to accelerate deductions into the current year by prepaying some of next year’s deductible expenses and to defer income where possible until next year. This can work particularly well if you are self-employed or have some degree of control over when you get paid. This planning, however, requires consideration of the alternative minimum tax. Some deductions (e.g., state and local income taxes, real estate taxes), which may be deductible for regular tax purposes, may not be deductible for AMT purposes.
2. Give careful thought to charitable contributions and charitable giving rules. By contributing appreciated property to charity, you may get a charitable contribution deduction for the full value of the property without paying tax on the capital gain. By selling depreciated property and donating the proceeds of the sale to charity, you can claim both a capital loss and a charitable contribution deduction. Make sure, however, that you are familiar with limitation and substantiation rules before making a charitable contribution as they have undergone many changes in the past few years. Also, be aware that you may only deduct (with certain exceptions) your out-of-pocket expenses when donating services.
3. Maximize benefits that generate above-the-line deductions. Above-the-line deductions are those expenses you can subtract from your income in determining your adjusted gross income. Traditional individual retirement account and health savings account contributions, moving expenses, self-employed health insurance costs and alimony payments are some above-the-line deductions that can help lower your taxable income. Contributions to a traditional IRA may be made as late as April 15, 2008, and will still be eligible for deduction in 2007.
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4. Consider selling stocks with a loss position. If you have a capital gain position for the year, consider selling stocks with a loss position to offset capital gains and up to $3,000 of ordinary income. To the extent you have a capital loss in excess of $3,000 for the year, you may want to consider selling stocks that will generate capital gain to offset the excess capital loss.
5. Consider transferring minimum required distributions from your IRA to charity. A provision in the Pension Protection Act of 2006 allows taxpayers who are 70 or older to transfer up to $100,000 per year from their traditional IRA to a public charity without having to include such amount in their gross income. Thus, if you are 70 and do not need all or part of the minimum required distribution you are to receive this year, consider directing the fiduciary of your IRA to pay such amount to a public charity. While you are not entitled to a charitable contribution deduction for this amount, the exclusion of this amount from your gross income may make you eligible for other deductions that are subject to AGI phase-out limitations.
6. Be mindful of the phaseout of itemized deduction and personal exemption reductions. As part of the Economic Growth and Tax Relief Reconciliation Act of 2001, the itemized deduction and personal exemption reductions applicable to high-income taxpayers are being phased out and repealed. If you are subject to these reductions in 2007, the haircut will be reduced by one third (i.e., the haircut will be reduced to two thirds of its original amount).
7. Take advantage of the extension of capital gain and qualified dividend income tax rate reductions, unless you can do better. Capital gain and qualified dividends are taxed at a 15 percent rate (5 percent for taxpayers whose highest marginal income tax rate is 15 percent or lower ) through 2010. However, if you have excess investment interest expense you may be able to reduce that rate to zero by making an election to treat such income as investment income that can be offset by the excess investment interest expense. Also, beware the minimum tax. Although the 15 percent rate also applies to the AMT, capital gains are counted in determining whether and how much of the AMT exemption will be lost to the phaseout. Capital gains that result in less AMT exemption are taxed at a 21.5 percent rate, not 15 percent.
8. Maximize 401(k) contributions. It is not too late to change your 401(k) contributions in order to maximize your elective contributions for the current year. The contribution limitation for 2007 is $15,500 ($20,500 if you are 50 or over) and any amount contributed to your 401(k) account is excluded from your taxable income. You might also consider contributing to a Roth 401(k) if your employer offers such an account. Like a Roth IRA, the income earned in these accounts is never subject to tax but, unlike regular 401(k) contributions, contributions to a Roth 401(k) are not excluded from your taxable income.
9. Utilize employer-sponsored programs. The end of the year is the time to start thinking about which employer-sponsored programs you should take advantage of in 2008 as the open enrollment period for employer-sponsored programs is about to begin (or has already begun). Participation in these programs can reduce next year's taxable income. While there are many employer-sponsored benefit programs that allow pretax dollars to be used for various personal expenses, the most common programs available to employees are flexible spending accounts for dependent care and/or medical expense reimbursement and HSAs.
10. Jump start a 529 plan for education. The Pension Protection Act of 2006 made the tax advantages of 529 plans permanent. Thus, if you were previously wary about setting up a 529 plan because of the uncertainty of its tax-advantaged future, now is the time to act. Distributions from 529 plans are tax-free if used to pay qualified higher education expenses. You may elect to treat a current-year contribution to a 529 plan as having been spread over five years for gift tax purposes, and thus make a current year contribution of $60,000 per donee without gift tax consequences (assuming you have not previously made contributions to a 529 plan for a particular donee).
11. Do not forget to make gift tax annual exclusion transfers. If you are financially able, you should consider establishing a gifting program for your children and grandchildren to take advantage of the gift tax annual exclusion. Gifts of up to $12,000 per donee ($24,000 for married couples) are generally excluded from gift tax. Annual exclusion gifts can be made to any number of donees.
12. Consider contributing to a Roth IRA. While contributions to a Roth IRA are not tax-free, earnings on such accounts are tax-free. In addition, Roth IRAs are not subject to the minimum distribution requirements for traditional IRAs. You may contribute to your Roth IRA until the original due date of your income tax return (i.e., April 15, 2007). Also note that as part of the Tax Increase Prevention and Reconciliation Act of 2005 signed this year, the AGI limitation ($100,000) for the conversion of IRAs and qualified retirement plans to Roth IRAs will be eliminated in 2010. If you intend to take advantage of this provision, you will need to start planning now so that you will be able to pay the income tax liability associated with the conversion.
13. Don't let the "kiddie tax" ruin your planning. In 2008, the "kiddie tax" (the rules that require a portion of a child's unearned income to be taxed at the parents' marginal rate) will be expanded to apply to full time students under the age of 24 whose earned income does not represent at least one-half of their support. In order to avoid the kiddie tax, a student who will be 18 or older at the end of 2007 may want to consider recognizing gain on appreciated property in 2007, particularly if it will allow the student to take advantage of the 5 percent capital gains rate.
14. Perform an overall financial checkup. The end of the year is always a good time for you to assess your current financial situation and plan for your future. Included in this assessment should be cash flow planning, health care planning, retirement planning, investment planning and estate planning. You should also update wills, powers of attorney and health care proxies for changes that may have occurred during the year. Remember, it's never too early or too late to start planning for the future!
"Keep in mind that these tax tips are general tax advice and may not be applicable to your particular circumstances," said Justin Ransome, a partner in Grant Thornton's National Tax Office. "Make sure that you consult with your personal tax advisor before implementing any changes or additions to your tax planning strategy."
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This document supports Grant Thornton LLP's marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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