Year-End Strategies to Trim Your Taxes

WSJ Tax article
Year-End Strategies to Trim Your Taxes

DECEMBER 3, 2008


‘Tis the season to make last-minute tax-saving moves. Just don’t automatically repeat everything you’ve done in past years.

Because of several tax-law changes and questions about what may lie ahead in 2009, you may need to consider new strategies — or at least a few variations on old themes.

Year-end tax planning “will be trickier than usual” because of factors such as the stock market’s volatility and the possibility of significant tax changes next year when Barack Obama takes over as president, says Sidney Kess, a New York accountant and lawyer. During the campaign, then-Sen. Obama proposed cutting taxes for most Americans while raising income taxes and capital-gains taxes for those at the top end of the income scale. But he also indicated he might postpone recommending any tax increases if the economy looked shaky — as it now clearly does.

Adding to the uncertainty, “there might even be another economic stimulus package carrying tax changes” enacted before the end of this year, says a new, 93-page publication by the tax and accounting business of Thomson Reuters.

A separate report by CCH, a Wolters Kluwer unit, warns that this year is “especially challenging for year-end planning” in view of “a flood of eleventh-hour tax law and regulatory changes.” CCH estimates there have been more than 500 changes this year to the Internal Revenue Code.

But don’t throw out your old playbook entirely. Many time-honored techniques will still work well for most people. Among them is one that is especially timely this year in view of sharp declines in stock and bond prices: Consider dumping losers you were thinking of getting rid of anyway. Those losses can be valuable for tax savings.

Also, if you’re thinking of investing in mutual funds this month for a taxable account, contact each fund or check its Web site to see whether it’s planning to make large year-end capital-gains distributions soon. Even some funds that have lost money this year are planning December payouts. If a fund you’re considering is planning a big payout soon that will affect your tax bill, consider waiting to invest in that fund until after the date to qualify for the distribution.

Here are a few other ideas that tax and investment strategists are recommending:

Timing is everything. In most cases, it pays to accelerate deductions, such as charitable donations and state and local tax payments, into the current year whenever possible. But that strategy may backfire for some people this year because of an important law enacted earlier this year: If you claim the standard deduction for 2008, you can take an additional amount to reflect real-estate taxes. (This additional standard deduction is also available for 2009.)

This change is likely to mean some people who itemized deductions in past years might be better off claiming the standard deduction for 2008 — and thus deferring items such as charitable donations and state and local taxes into next year, when they might be deductible.

The maximum amount of the new additional standard deduction for state and local real-estate taxes is $1,000 for married couples who file jointly and $500 for singles. The basic standard deduction for 2008 is $10,900 for joint filers and $5,450 for most singles. There are additional amounts for those who are 65 or older and blind.

Thus, a married couple filing jointly, each at least 65, and who paid at least $1,000 of real-estate taxes, would get a standard deduction for 2008 of $14,000, says Bob Scharin, senior tax analyst at Thomson Reuters. (That’s the $10,900 basic standard deduction plus $1,050 for the elderly husband, $1,050 for the elderly wife and $1,000 for their real-estate taxes.)

Another complicating factor is the alternative minimum tax. The AMT, a separate way of calculating your taxes, operates under many different rules than the regular system. For example, you can’t deduct state and local taxes under the AMT. Thus, if you’re ensnared by the AMT or claim the standard deduction for 2008, don’t prepay state and local taxes this month that aren’t due until 2009, says Mr. Scharin. About four million people were caught by the AMT for 2007, and roughly the same number will be for 2008. It’s unclear what Congress will do about the AMT next year.

Tax swaps. Some investors recently have been selling municipal bonds at a loss, thus nailing down capital losses that can be used to cut taxes, and then reinvesting the proceeds in other municipal bonds with similar credit ratings and durations, says Benjamin A. Pace III, a managing director at Deutsche Bank Private Wealth Management. “We’re seeing some interest lately” among wealthy investors in this tax-swapping technique, mainly with municipal bonds, Mr. Pace says. “You can do this without changing the nature of your credit quality or duration.”

Capital gains. On the campaign trail, then-Sen. Obama proposed increasing the top rate on long-term capital gains, now 15%, to 20% for people making more than $250,000. With the economy in a deep slump, it’s unclear whether President-elect Obama will delay that plan. Thus, investment advisers are urging most clients not to rush out and sell stocks now purely to take advantage of the 15% rate, which may remain the same next year, after all.

Whatever the case, never make any investment move based solely on tax considerations, says Blanche Lark Christerson, a managing director at Deutsche Bank Private Wealth Management.

Stayin’ alive. Buried in the tax law is a powerful incentive for many wealthy people who care about their heirs to stay alive at least until the dawn of 2009. The basic federal estate-tax exclusion, now $2 million, is scheduled to soar to $3.5 million next year. Thus, if someone survives until Jan. 1, an additional $1.5 million of that person’s estate will be sheltered from the federal estate tax, where the top rate is 45% both this year and next.

Mr. Kess says wealthy people should also consider taking advantage of the annual gift-tax exclusion, which allows you to give away as much as $12,000 this year to anyone you want — and to as many people as you wish — without any tax considerations. That amount will rise next year to $13,000. With stock prices down sharply, more shares can be transferred this way, he says.

Other breaks. First-time homebuyers will have until mid-2009 to claim a new refundable tax credit for a qualifying home purchase in the U.S., says a CCH report. But the credit must be repaid in equal installments over 15 years, or earlier if the house is sold. Thus, it’s effectively an interest-free loan from Uncle Sam, CCH says.

Congress also extended the life of several popular breaks that had expired. Among them is one that allows taxpayers who itemize to deduct their state and local sales taxes instead of their state and local income taxes. This law, which was extended through 2009, is especially important for taxpayers who live in Florida, Texas, Washington and other states that have no income tax. But it also benefits millions of other people in many other states.

About Jorge Costales

- Cuban Exile [veni] - Raised in Miami [vidi] - American Citizen [vici]
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