Happy holidays and tax planning season.
Many Americans may only be concerned with filing their taxes by the April 15 deadline, but if you want to take full advantage of the savings to which you may be entitled, it’s essential to takes some steps before you celebrate the holidays are over.
Start With The AMT
As with many tax matters these days, much depends on whether you are subject to the dreaded Alternative Minimum Tax.
The AMT is a tax that eliminates many deductions and credits for people who would otherwise pay less tax because their income allows them to take advantage of certain deductions and credits provided under tax laws. The AMT was initially aimed at a very small number of upper income-tax payers, but it has been ensnaring an increasing number of middle-income people because it is not adjusted for inflation.
Tom Ochensclager, vice president of taxation with AICPA, says consult your accountant to find out whether you'll be subject to the AMT. For those who prefer to do it on their own, he says programs such as Turbo Tax can be very helpful in determining your fate. The IRS also offers assistance on its website where you'll find an AMT assistant.
People affected by the AMT have to bring back into their income any taxes that are itemized such as state income, real estate and sales taxes as well as items such as employee expenses and dependents exemptions.
Peter Hukki, a licensed tax payment representative in JK Harris Co.'s audit department, says as a result, if you are subject to AMT, making early tax payments won't be beneficial.
If the AMT is not for you, you can start by accelerating your January mortgage payment. By paying before Dec. 31, the interest deduction counts in 2008 rather than next year.
You may also want to consider early payments for your property, state and local taxes, as well as making additional charitable contributions to take advantage of those benefits.
In terms of other tax planning techniques, Ochensclager, says you should also consider how your state handles income tax.
Taxpayers are allowed to choose whether to deduct state and local sales taxes instead of income tax. According to Ochensclager, this is a provisions that can be very beneficial to people living in the states that don't have income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—and those with minimum coverage, such as New Hampshire and Tennessee, which limit state income taxes to only dividends and interest income.
For states that have high sales tax but no income tax, the sales tax can add up to a big deduction, says Ochensclager. This is particularly true if you made a big ticket purchase this year, in which case make sure to save your receipts.
If you haven't made any major purchases, the IRS offers a useful tool that can help determine what the average consumer would pay in sales tax based on their income level.
Going Green Pays
Because of some tax credits that are available to taxpayers in 2008, when considering your year-end tax planning you may also want to think about whether now may be a good time to make certain big ticket purchase before the year is over.
For instance, if you were thinking about purchasing a car in the near future, you may want to make it before year's end—that is as long as it's a hybrid.
"To get the full credit, would want to drive off the lot this year to get 2008 credit," Hukki said.
According to the IRS, the credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
For 2009 models, the Ford Escape and the Mercury Mariner Hybrid 2-wheel drive models, will yield a credit of $3,000, while the 4-wheel drive versions of each model will offer a credit of $1,950, according to the IRS.
There is also a credit for qualifying first-time home buyers that was included in the Housing and Economic Recovery Act of 2008. The credit, according to the IRS, applies to homes bought after April 8, 2008, and before July 1, 2009. The credit can cut your tax bill or increases your refund, dollar for dollar. The credit basically acts as an interest-free loan that must be repaid over a 15-year period, beginning in 2010, and can provide up to $7,500 in immediate tax relief.
So, if you close on a house in 2008 or into 2009, you immediately get that refund or you lower the taxes you would have owed by $7,500.
There is also a tax benefit, also under the Housing and Economic Recovery Act of 2008, which is geared to homeowners who don't itemize but instead take the standard deduction, likely because they have already paid off their mortgage. This provision lets these people add on the property taxes paid on their house to the standard deduction and "is particularly important for baby boomers that are retired now," he said.
Another tax factor to be aware of is the estate tax, which is the tax posed on assets that are transferred after death. The future status of the estate tax remains uncertain. As per the IRS, for decedents dying in 2008, an estate tax filing is required for gross assets and prior taxable gifts exceeding $2 million. In 2009 this increases to $3.5 million. However, in 2010 things get tricky as the tax is repealed just to be reinstated the following year for assets exceeding $1 million. The catch here, though is that this can change as many expect President-elect Barack Obama will seek to have the tax set at the 2009 level of $3.5 million.
While any tax changes that are made during the Obama administration in
2009 are highly unlikely to be retroactive to 2008, there are some other proposals as well that experts say you should be aware of and discuss with your CPA as they may, if implemented, impact some elements of your 2008 planning. (See related story)
One is an increase in the preferred rate on qualified dividends and capital gains from 15 percent to 20 percent, or even 25 percent for high-income earners. If you have a lot of unrealized gains in your portfolio you may want to consider taking some of them now in case the tax rate increases later.
Obama's tax proposals also include imposing higher taxes on couples earning more than $250,000 a year ($200,000 for individuals).
Again, while any changes made during the Obama administration are unlikely to have an impact on the 2008 tax year, it is worth discussing these possibilities, as well as other tax-planning issues before the year is up to ensure you are taking advantage of as many breaks as possible.