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Family Tax Planning

Year-End 2007

With the year drawing to a close, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your tax bill.

TRADITIONAL TAX STRATEGIES

Year-end tax planning tips typically fall into two general groups: (1) the traditional strategies that have proven themselves useful year after year, and (2) new opportunities that have arisen from recent changes to the tax laws.

Income shifting

One of the most fundamental year-end tax planning techniques involves accelerating deductible expenses in 2007 and deferring income, if economically feasible, into 2008. By delaying taxable income you defer taxes

Deduction management

Essential end of the year tax planning requires determining whether you will take the standard deduction or whether you will itemize your deductions. Consider "bunching" deductible medical expenses this year; make an extra mortgage payment, donate more to charity, or pay your property tax before the year-end.

 
Portfolio timing

The end of the year is an ideal time to examine your to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses.

Starting in 2008, traditional strategies in connection with capital gains and losses also need to accommodate a special, nontraditional opportunity -- the zero percent net capital gain rate for tax years 2008 through 2010. While this zero rate is only available for individuals in the 10 or 15 percent income tax brackets, it is well worth families, retirees, and others to manage their income tax brackets starting in 2008. That management starts at year-end 2007, as does the decision over whether to postpone a sale of a capital asset until January 2008 to take advantage of this favorable, zero rate.

 
Retirement planning

Year-end planning for 2007 also involves maximizing annual contributions to your retirement plan accounts, since one year's limit cannot be added to the next year's if not taken in time. While contributions to IRAs may be applied retroactively if made before the filing deadline, contributions to qualified plans must be made before the end of the calendar year.

Gift-giving

Take advantage of the 2007 annual and lifetime gift-giving limits to reduce your income and estate tax liabilities. For 2007 and then again in 2008, you can transfer $12,000 per person, per year, without paying gift tax on the amounts transferred. Married couples can gift $24,000 per person, per year without tax liability on the amounts transferred. That strategy not only avoids the possibility of paying a hefty estate tax later, but it removes earnings from those gifts from your taxable income bracket into that of the lower-bracket gift recipient.

Tax law changes constantly, and therefore so must individual tax planning. Tax year 2007 is no exception. While fundamental techniques should not be overlooked, attention to tax legislation --both tax laws passed since last year and those tax laws that may be put to a vote in Congress before year's end -- is equally important for most taxpayers. Here are the more important changes, and potential changes, directly impacting 2007 year-end tax planning.

Kiddie Tax

The Small Business and Work Opportunity Tax Act of 2007 introduced a number of tax incentives for small business, but included a few pitfalls for individuals. For 2007, a child under the age of 18 is subject to the "kiddie tax" (and thus pays tax at his or her parents' highest marginal tax rate on unearned income in excess of $1,700). But in 2008, the applicable age rises and the kiddie tax will apply to a child under the age of 19 and full-time students under age 24. In light of this development, parents should consider selling appreciated stock and other assets belonging to their children now, especially if they will be in the 19 to 24 year-old category next year.

Expiring provisions

A variety of popular tax credits are set to sunset at the end of 2007, unless Congress extends them. However, don't wait to see what Congress does. Assess your tax situation as if Congress won't extend the tax breaks that apply to you. If this landscape changes, then fine-tuning in December is always possible: Tax breaks set to expire at the end of 2007 include:

 

 

ALTERNATIVE MINIMUM TAX

Unfortunately, the alternative minimum tax (AMT) may require both traditional year-end planning techniques and new strategies to avoid or at least minimize its reach into a growing number of taxpayers' pockets

For a more detailed plan that can be customized to your particular circumstances, please don't hesitate to give this office a call at (302) 378-3734.

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