Sunday, December 17, 2006

Year End Tax Planning

While I'm busy making last minute year-end suggestions, I thought I'd share a few of my favorites (extracted in part from a client memo I just drafted):

Charitable giving:

Cash is always sure to mail the check before 12/31/06.

Non-cash contributions (be sure to ask for a receipt) - there is a listing of values here, to use as a guide for "good quality" items.

Donate appreciated property - you do not have to pay the capital gains tax on the appreciation, but can claim a deduction for the full fair market value of the property (get an appraisal if it's worth more than $5,000)

New this year (and especially helpful if you don't itemize deductions), transfers directly from an IRA to a qualified charity are not taxed (must be over age 70 1/2 and limited to $100,000); this can be a good solicitation incentive if you are helping charities with fundraising also. It's about time we got this one (now if they'll just lower the age requirement)!

Other Itemized Deductions:

If your deductions don't normally allow you to itemize, consider bunching together two years' worth of expenses in one year and then using the "standard" deduction the next year.

Pay your state income and property taxes in December (but if you are subject to Alternative Minimum Tax, this may not help you)

Refinance credit card debt with a home equity loan so that the interest can be deducted (too late to help you this year, but do this sooner rather than later)

Tax Credits:

New energy efficient tax credits for hybrid cars and home improvements purchased in 2006 (up to $2,400)

Business deductions:

For trucks and SUVs with a loaded GVW > 6,000 pounds, the entire cost may be deducted (Section 179) if purchased in 2006, even if the cost is financed and not paid in 2006

Establish retirement plan before year-end (the contributions don't have to be made until the due date for the return but in some cases the plan has to be established by 12/31).

If you are selling business assets or rental property, consider doing a tax-deferred (Section 1031) exchange.

Put your kids to work! Deduct their salary (not subject to social security taxes if they are under 18) and pay their tuition. ;-) You can also then make an IRA contribution for them.

Education strategies:

529 Plans are hands down my favorite option to save for future education expenses. While there are tax credits available for current higher education tuition expenses, 529 Plans are the greatest thing since sliced bread when saving for the future (they are one of the few "tools" out there that allow someone to make a completed gift for estate tax purposes and yet retain full control over the money; the deposits grow tax-deferred and are tax-free if withdrawn for education expenses). Each state's plan goes by a different name and is tied to a particular investment brokerage firm with set investment options, but you are not tied to the plan in your state (e.g. if you want to work with American Century, you can open a Kansas Learning Quest account). The money is not tied to any particular educational institution. Most states allow for a state tax deduction based on the amount contributed.

Capital Gains and Losses (outside of retirement accounts):

Be sure to hold stocks for more than 12 months in order to qualify for lower capital gains rates. The rate difference can be significant (15% vs. 35%) if you fail to meet the 1 year holding period.

If you have capital gains, consider selling off stocks that have lost money if you don't expect them to rebound. Be sure to tell your broker which lot to sell if you have multiple lots, sell the ones that cost the most (biggest loss). Be sure to count reinvested dividends as part of your cost basis.

Mutual funds pay capital gain dividends in Nov-Dec so take these into account, and consider waiting to buy mutual funds until January so you don't have to pay tax on gains that are built into the price of the funds you may purchase in Nov-Dec.

Estate Planning or Business Succession Planning questions?

Email me. ;-)


At 5:25 PM, December 18, 2006, Blogger LZ Blogger said...

Gwynne ~ I remember taking my stock loss woes to my account several years ago... and he said I would have to split the losses over a couple (or more years)... as if it wasn't bad enough telling him of "my stupid investments" in the first place! Just wanted to stop by here and wish you and your family a VERY MERRY CHRISTMAS! ~ jb///

At 8:50 PM, December 18, 2006, Blogger Gwynne said...

Thanks, Jerry! A Merry Christmas to you and your family as well!

And yes, the capital losses don't help do much but offset capital gains if you are fortunate enough to have those. Those darned accountants, always rubbing salt in the wounds, aren't they? ;-)

At 8:50 PM, December 18, 2006, Blogger Gwynne said...

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