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Say Goodbye to 2007 with Some Smart Tax
Moves
December's a busy month, but it's not too late to focus on
last-minute tax savings. Consult a tax or financial advisor such
as a Certified Financial Planner™ professional to see if these
might work for you:
Do an AMT sweep. One of the reasons why it's wise to
consult a tax adviser before you start accelerating deductions
is that certain people over $75,000 find themselves more
susceptible to the alternative minimum tax if they proceed. The
AMT is an alternative taxation process that's figured separately
from your regular tax liability and you have to pay whichever
tax is higher. State and local income taxes and property taxes,
for example, are not deductible when figuring the AMT. Under the
regular rules, medical expenses that exceed 7.5 percent of
adjusted gross income can be deducted under the regular rules,
but under the AMT, that threshold is 10 percent. Also, under
regular rules, interest on up to $100,000 of home-equity loan
debt is deductible no matter how the money is used, but under
the AMT, the deduction holds only if the money was used to buy
or improve a primary or second home. It pays to check your AMT
risk before you execute any end-of-the-year tax-savings
strategy.
Check investment gains and losses. If you have some
capital losses in your taxable investment accounts, see if it
makes sense to sell and offset them against any capital gains
you've realized this year. Such losses can offset 100 percent of
capital gains plus up to another $3,000 in ordinary income. Any
losses in excess of that number can be carried forward to the
next tax year.
Prepay property taxes. If it makes sense to accelerate
that deduction, pay those early 2008 taxes before the end of the
month.
Prepay state taxes. Again, if it makes sense based on
your tax situation, consider making a fourth-quarter estimated
state tax payment due in January this month to accelerate the
deduction.
Defer income if possible. Self-employed people and
some business owners might elect to invoice customers in January
so they don't have to include that income on their 2007 return.
Keep in mind that it only makes sense to defer income if you
think you will be in the same or lower tax bracket next year.
Got time to go green? December isn't exactly
everyone's favorite month for home renovations, but if you are
inclined to replace windows, insulation or heating/air
conditioning systems that meet particular energy conservation
standards, you might qualify for a credit up to $500.
Consider the sales tax/income tax tradeoff. Taxpayers
in 2007 will again have the option of claiming either state
income tax paid or state sales taxes paid as itemized Schedule A
deductions. If your state doesn't have an income tax, definitely
start totaling all the sales taxes you've paid. However, if you
do pay a state income tax but have purchased such big-ticket
items as cars, boats or construction supplies and equipment
during the year, run the numbers anyway. The total sales tax
deduction is figured on an amount from the IRS state sales tax
tables in addition to the actual sales tax amounts paid on the
major purchase items. The alternative is to ignore the IRS
Tables, and simply add up all sales tax payments.
Plan a stock donation to charity. If you have stock
with a large unrealized capital gain that you've held longer
than a year, you can give that stock to a qualified charity and
claim a deduction for the current fair market value of the
security. If you have a stock with an unrealized capital loss,
do the opposite - sell the stock, claim the capital loss, then
donate the resulting cash proceeds to charity. This is actually
better than just donating cash, because you get the same
deduction and never have to pay the capital gains taxes from the
appreciated security.
Make sure donations are documented. As of January 1
this year, you now must have a either a receipt or a canceled
check to back up any contribution, regardless of the amount. If
you don't have such a written record, the IRS will reject the
write-off if the lack of proper record keeping is discovered in
an audit.
December 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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