11/19/2008
This Tax Planning & Practice Guide generally is oriented towards the time-honored approach of deferring income and accelerating deductions to minimize 2008 taxes. For individuals, deferring income also may help minimize or avoid AGI-based phaseouts of various tax breaks. As always, however, year-end tax planning doesn't occur in a vacuum. It must take account of each taxpayer's particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. While most taxpayers will come out ahead by following the traditional approach, others with special circumstances will do better by accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up the billing and collection process instead of deferring income by slowing it down. Or, a cash-method taxpayer who sells property in 2008 can accelerate income by electing out of the installment method.
Capital gains. Long-term capital gains are taxed at a maximum rate of 15% (at 0% in 2008 if they would otherwise be taxed at a rate below 25% if they were taxed as ordinary income).
IRA and Roth-IRA year-end moves. These include recharacterizing an IRA-to-Roth IRA convention, coping with losses in a retirement account, withdrawing required minimum distributions before year-end to avoid a penalty, and accelerating the first required minimum distribution.
Expensing deduction. For tax years beginning in 2008, the maximum amount of eligible assets that can be expensed (deducted in full) under Code Sec. 179 is $250,000, and the expensing deduction doesn't begin to phase out until expensing-eligible property placed in service during the year exceeds $800,000). This means that many small and medium sized businesses will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.
Charitable contributions. The timing of charitable contributions can have an important impact on year-end tax planning. Note that for 2008 (as well as 2009), individual taxpayers who are at least 70 1/2 years old may contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers may be able to reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity.
Net operating losses and debt cancellation income. A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. There also are a number of different kinds of debt cancellation or debt reduction transactions that may generate taxable income in 2008 if not deferred until next year.
Energy tax incentives. Tax credits are available for some qualifying energy-efficient home improvements made in 2008, while others will be available for 2009 only.
Sales and tax exemptions for hybrid and alternative fuel vehicles. Beginning January 1, 2009, purchases or acquisitions of certain vehicles that use clean alternative fuels are exempt from Washington sales and use taxes for a limited period of time. The vehicles must be new passenger vehicles (less than 10,000 GVW) that are either 1) powered exclusively by such clean alternative fuels as natural gas, propane, hydrogen, or electricity; or 2) use hybrid technology and have an EPA highway rating of at least 40 mpg. This exemption expires on January 1, 2011.
As always, if you have any questions regarding the above or something you “may have heard” regarding tax planning please don’t hesitate to call us. |
