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2008/2009 Tax Planning Where Are We Now and Where Are We Heading?

By Terence E. Smolev

Now is the time to review your tax situation to minimize your 2008 tax bill and plan for changes occurring in 2009.

Those who believe tax rates will be lower in 2009 or their income will decrease should consider shifting 2008 income, if possible, to 2009. In addition, 2008 deductions that may be worth more now then in 2009, such as medical costs, should be carefully investigated.

Many tax professionals believe that the long term capital gain federal tax rate will increase from 15% to 20% for 2009. If the new President and Congress change the law, it would be better to take capital gains in 2008 at a lower tax rate than in 2009. Those having capital gains from the beginning of the year may wish to review their stock and bond portfolio with a financial advisor to determine whether to sell items which they are currently holding at capital loss to offset the previously obtained capital gains. Remember that all capital losses can be taken against all capital gains, plus an additional $3,000.00 of losses to offset ordinary income from other sources.

Before the end of 2008, various tax strategies should be considered to attempt to bring one's tax status out of the AMT (alternative minimum tax) trap. Consider delaying the payment of certain items, such as state and local income taxes, property taxes, medical expenses and certain miscellaneous expenses. Also consider postponing charitable payments, avoiding the exercise of incentive stock options, and making use of any AMT credit that may be applicable to your situation. It is important to review how the strategies will affect credit standing, responsibility to your creditors, and other non-tax issues.

Other planning strategies permitted by recent changes in the Tax Law include forgiveness or mortgage indebtedness for homeowners who have part of their mortgage debt forgiven as a result of workouts or foreclosures. Normally, without the statutory protection, forgiveness of debt is an income taxable item. Also, it is permissible to have individual retirement accounts make payment up to $100,000.00 directly to a charity for charitable purposes. That charitable opportunity is permitted for taxpayers age 701/2 or older through December 31, 2009. In addition, the statute permitting the deduction of state and local sales taxes in lieu of state and local income taxes has been extended through December 31, 2009 retroactive for 2008.

First time home buyers are given a tax credit of $7,500.00 for single individuals and married couples filing jointly, and $3,750.00 for married individuals filing separate returns. While this is only a temporary credit, the taxpayer is permitted to repay that credit in equal amounts over the succeeding fifteen (15) years after the year of credit. This is intended to jump start the purchase of homes.

For 2008, 401K and 403B pension plans permit salary deferrals to the max of $15,500.00. If the participant in the plan is age 50 or older for 2008 there is an additional $5,000.00 per year contribution allowed. For 2009, that $5,000.00 will increase to $5,500.00. For IRA plans, the permissible contribution and deduction is $5,000.00 for 2008 and for 2009 becomes subject to annual cost of living adjustments. However, the social security wage base will increase from $102,000.00 in 2008 to $106,800.00 in 2009. The catch up for IRA's in 2009 will be $1,000.00, the same as it is in 2008.

Appreciated stock in any corporation can be donated directly to a qualified charity, allowing a deduction as of the day the properly endorsed certificates were handed to the charity. Any unrealized capital gain will not be taxed and you will be permitted to take the full fair market value of the stock as a deduction on your income tax return.

If you are interested in a “like kind” transaction to transfer appreciated property without having to sell currently owned property, it is important that you contact us to make sure that the transaction is appropriately dealt with.

In 2009, based on the indexing for inflation the $12,000.00 annual exclusion for gift giving will increase to $13,000.00. With husbands and wives agreeing to “split gifts” anyone of them can give up to $26,000.00 to any other individual or individuals. Gift tax returns must be filed to show the gift and the consent to split the gift, but the transaction does not invade the lifetime execution of $1,000,000.00 of either the husband or wife.

The Federal estate tax exemption in 2008 of $2,000,000.00 will increase in 2009 to $3,500,000.00. Barring any congressional action, the current law provides no estate tax in 2010 and an exemption in 2011 of only $1,000,000.00. However, there are current Bills in Congress to maintain the exemption at $3,500,000.00 or possibly increase it to the $5,000,000.00 range. In addition, the tax rate at this time is expected to be forty-five (45%) percent.

A tax planning device being used by more and more taxpayers is called a Qualified Personal Residence Trust or QPRT. This tax planning strategy permits a homeowner to transfer his or her residence to a trust, the children being the beneficiary of the trust. The homeowner is permitted to continue to live in the residence for a certain number of years. At the end of the term of years, the house ownership passes absolutely to the children and the house is out of the parent's estate for estate tax purposes. If the parent chooses to continue to live in the residence and the children agree, a fair market rental agreement must be entered into between the parent and the children with periodic rental payments made based upon the fair market rental.

It is very likely that 2009 will see significant income tax changes that will place more dollars in the hands of taxpayers to jump start the lagging economy. It is a good bet that the capital gains tax at the federal level will increase. In addition, it is very likely that the estate tax will have either a continuation of the $3,500,000.00 exemption or have that amount increased. The likelihood of 2010 having the tax repealed and in 2011 the exemption returned to the old $1,000,000.00 level seems remote.

If you would like more information or assistance with your income, estate and gift tax planning, or you have a tax compliance issue with a taxing authority, please contact me.

333 Earle Ovington Blvd.
Suite 1010
Uniondale, NY 11553
t: 516.248.1700
f: 516.248.1729
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