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2008/2009 Tax Planning Where Are We Now and Where Are We
By Terence E. Smolev
Now is the time to review your tax situation to
minimize your 2008 tax bill and plan for changes occurring
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
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
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
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