Adjust Text Size> Tax Tips for A Recession
After President-elect Obama takes office, many experts expect an eventual increase in capital gains and income tax rates for high net worth individuals. However, it’s likely the current recession might delay some of these anticipated increases. Accordingly, rather than worry about the impact of future tax increases, your time is better spent casting an eagle eye on your 2008 taxes. Especially in a recession, it’s gratifying to find tax strategies that enable you to keep more of what you earn out of Uncle Sam’s pockets. To your surprise, you may even find a silver tax lining in the current financial cloud. The down market creates opportunities for you to:
- Use your losses. Tax loss harvesting is important in any market. While you can reduce your ordinary taxable income by up to $3,000 in net capital losses each year, you can carry over losses that exceed the $3,000 limit to a future year. That strategy could be especially beneficial if the capital gains rate increases in the future.
Convert to a Roth. If converting your Traditional IRA to a Roth IRA would fit into your diversified portfolio, but you’ve always balked at paying the taxes due upon conversion, now might be a good time to convert. Why? While you’ll still pay income taxes on the amount being converted, lower account values now mean your tax liability on a conversion will be lower. Although taxpayers with modified adjusted gross income of more than $100,000 are not eligible to do a conversion in 2008 or 2009, keep in mind that this limit will be lifted for conversions beginning in 2010.
- Take advantage of first-time homebuyer credits. If you’re in the market for your first home, falling real estate prices and low interest rates are obviously good news. Additionally, there’s a tax credit of up to $7,500 for qualified first-time homebuyers who purchase their house after April 8, 2008, and before July 1, 2009. Although you have to repay the amount of the credit over the next 15 years, you get a break on your current-year taxes at a time when your budget might be especially tight.
- Dollar-cost average. Designed to reduce market risk, dollar-cost averaging involves investing a fixed dollar amount at predetermined intervals, as you do with your 401(k) plan. Your set contribution buys fewer shares when the market is up and more shares when the market is down. Rather than focus on a sector you perceive as safe, continue to make broad-based contributions on a regular basis to your 401(k) or IRA to enjoy the power of tax-deferred growth.
- Stay tuned for help from D.C. While the $700 billion figure got all the press in Congress’ bailout package, the bailout also includes some important tax provisions for average Americans. For instance, the alternative minimum tax (AMT), intended initially to ensure that people with high incomes couldn't dodge their fair share of taxes, was again “patched” to prevent it from catching more middle-income taxpayers. The patch increases the amounts you can exempt from your taxable income in calculating your 2008 AMT to $69,950 for married couples filing jointly, $46,200 for singles and heads of households, and $34,975 for married couples filing separately. This higher exemption amount may help you to avoid the AMT, enabling you to take advantage of deductions that the AMT disallows.
Another provision that may affect a large number of taxpayers is the extension for 2008 and 2009 of an option to deduct state and local sales tax instead of state and local income tax. So, if you live in a state with little or no income tax, and you are already planning to purchase a big ticket item such as a car, you might want to do it over the course of the next year.
Finally, On December 11, 2008, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327). Much of the legislation relates to pension plan funding requirements. However, one of the most significant provisions in the legislation is the temporary suspension of required minimum distributions (RMDs) for 2009 from IRAs and employer plans. The Act does not, however, make any changes to 2008 RMDs, which generally must be taken no later than December 31, 2008 (April 1, 2009, for account owners who turned age 70½ in 2008).
- Contribute to your favorite charity. Talk about win/win. Writing a check reduces your taxable income and funds a cause you care about. However, if you have appreciated stock that you’ve held for more than one year, donating the stock instead of cash delivers a double bonus. You’ll avoid paying tax on the appreciation, but will be able to deduct the full value of the stock.
- Recalculate your rebate. If you received less than the maximum for your Economic Stimulus Act rebate check, you have a second chance to claim your fair share. Your 2007 rebate was an advance payment for what’s due on your 2008 tax return. According to the technical language of the tax bill, individuals are due a check for the better of the amount due based on their 2007 and 2008 tax returns. If you phased out of the rebate because your income was too high, strategies like deferring income to 2009 or postponing IRA withdrawals could get you your rebate. A change in circumstances also could increase your rebate. For instance, a child born by the end of this year would be another dependent eligible for the child portion of the rebate credit, assuming it wasn't entirely phased out.
- Use Education Tax Credits. Tax credits are more valuable than deductions. The Hope Scholarship Credit gives parents a tax credit for 100% of the first $1,200 and 50% of the next $1,200 of a dependent child’s college tuition and mandatory fees for a maximum $1,800 annual tax credit per child. For students attending a degree program at least half-time and who have not completed their first two years of academic study before the beginning of the taxable year, the Hope Credit cannot be claimed in more than two tax years for any one student. The Lifetime Learning Credit is a tax credit for 20% of up to $10,000 in combined tuition and mandatory fees. There’s no requirement that students be studying towards a degree or enrolled at least half-time, and there is no limit on the number of years the credit may be taken. You can claim just one of these credits during any particular year. For tax year 2008, these credits are phased out for incomes between $48,000 and $58,000 and between $96,000 and $116,000 for married taxpayers filing jointly.
An election year always introduces doubt into tax planning and this year’s uncertain market only exacerbates investors’ anxieties. To ensure you’re in the best shape on April 15th, plan to consult with your financial and tax advisor early on in 2009.
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Source: http://personal.fidelity.com/misc/framesets/iwarticle.shtml?pagename=IW081107IMtaxlead1
Source: http://www.kitces.com/blog/index.php?/archives/16-Should-you-be-doing-2008-tax-planning-for-your-rebate-check.html
Source: http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php