It's none too soon to do some income tax planning

By KELLY COBURN, CPA

article created on: 2008-11-15T00:00:00

It’s not too soon to think about your income taxes.

Most of us find thinking about income taxes painful, and prefer to do so only once a year, when it is time to file our tax returns. But if you wait until next year to consider your tax obligations, there may be little you can do except to pay the bill.

There are a number of things you can do to reduce your income tax bill. However, most of them must be done before the year ends. By spending some time now, you may well find that next April is not so painful.

The purpose of this article is to highlight some actions you should consider now that will reduce your tax bill.

Deferring income can reduce your current tax bill. If you have a year-end bonus coming, talk to your employer about deferring payment until January of 2009. By doing so, it will not be taxable until next year. If you own a business, consider holding off shipping orders or billing customers until next January for late-in-the-year orders. Note: your method of accounting (cash or accrual) may affect your ability to use this technique, or the steps you must follow to make it work. Of course, if you expect to be in a higher tax bracket next year, deferring income may not make sense.

Do you have appreciated property you are considering selling? There are several tax planning strategies you can implement here. First, remember that capital assets held longer than one year are often taxed at a lower rate than those held for a year or less.

FEDERAL TAX RATE

Capital assets
held more than one year: 0% - 15%*

Capital assets
held one year or less: 0% - 35%

*there are special higher rates for collectibles and for depreciable assets

Strategy 1: Hold capital assets more than one year before you sell them.

Strategy 2: If you already have realized capital gains and you also have unrealized capital losses, consider selling the loss assets before year end to offset the losses against your gains.

Strategy 3: If you have long term capital assets and also plan to make a charitable donation, consider giving the asset to the charity instead of cash. For example, assume you have appreciated publicly traded securities. If you give the stock to a charity and let them sell it, you avoid paying tax on the capital gain. You also get a charitable deduction for the full fair-market value of the stock!

• This strategy will work with most appreciated property, but there are charitable deduction limitations (generally, 30 percent of adjusted gross income) to consider and some special rules to keep in mind: Gifts to private foundations are subject to lower limits; donations of non-publicly traded property (artwork or real estate, for example) valued at $5,000 or more must be appraised; gifts of appreciated tangible personal property must be used by the charity (not sold by it) in order to claim a charitable deduction in excess of your cost.
• Maximize contributions to your retirement plan and/or Individual Retirement Account (IRA). For 2008, the maximum deductible IRA contribution is $5,000 ($6,000 if you are age 50 or older). If you participate in a 401K plan at work, you can elect to defer up to $15,500 of your salary ($20,500 if you are age 50 or older). If you are an employer who sponsors a retirement plan, you may be able to contribute even more to the plan. If you have other employees, you will likely have to contribute for them as well. Since there are various deduction limits and fairly complex rules governing retirement plans, consulting with a tax professional with experience in this area is advisable.
• Take advantage of your employer’s flexible spending plan to pay for medical and/or childcare expenses. These plans let you pay expenses with pre-tax dollars.
• Paying state income taxes before the end of the year will allow you to deduct those payments on your 2008 Federal income tax return. (Caution: the Alternative Minimum Tax can eliminate this benefit; consult with your tax advisor to make sure the AMT does not apply to you before using this strategy!)
• Clean out your closet! Donating used clothing, household furnishings, appliances, etc. in good condition to a charity can yield tax savings. You can deduct the fair market value of these items as an itemized deduction.

There are many other strategies that may apply to your specific situation; we have only scratched the surface here.

If you would like to learn more, visit our Web site at www.gmco.com On the site you can subscribe to a quarterly financial planning newsletter or download a year-end tax planning guide.

Tax deductions can be yours, if you spend the time to look for them; happy hunting!

Kelly Coburn is a senior tax manager with Geffen, Mesher & Company in Portland, Ore.