Countdown time is here again, with reminders everywhere pointing out how many days are left until the New Year. While you’re marking your calendar for the holidays, remember that countdown time is great for tax planning, too.
The strategy you can use to reduce your 2007 tax bill is to deferring income and accelerate deductions.
1. If you are planning on selling an investment on which you have a gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year;
2. If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the employment taxes withheld) for another year. Deferral of tax generally won’t work where the bonus is contractually due in 2007. Negotiate the receipt date to be January 1 or later;
3. If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event;
4. If you are self employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients. If your business is cash basis, you can send invoices in late December so you receive the cash after December 31. If your business is accrual basis, send invoices after December 31.
1. Pay your entire property tax bill, including installments due in year 2008 by year-end;
2. 2007 year end purchases to consider:
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed. The credit is only available to the original purchaser of a new, qualifying vehicle.
Tax credits are available for certain types of home improvements including adding insulation, replacement windows, and certain high efficiency heating, hot water heaters and central air conditioning systems. The maximum amount of homeowner credit for all improvements combined is $500 during the two year period of the tax credit. This tax credit applies to improvements made to your primary residence from January 1, 2006 through December 31, 2007.
3. Make Charitable Contributions
You can donate property as well as money to a charity. A deduction is usually available for the fair market value of the property. However, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses.
4. Investment Gains And Losses
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher rate (up to 35%) than long-term gains (15% or lower). You might consider, where feasible, trying to reduce all capital gains and generate a capital losses up to $3,000.
The maximum long-term capital gains rate is currently 15%. This is set to rise to 20% in 2011. Many believe this increase could come about sooner with a change in administration in 2009.
Note: capital gain rate starts at Zero in 2008. From 2008 through 2010, if your taxable income falls within the 10% or 15% brackets, the rate you’ll pay on your federal return for certain dividends and long-term capital gains will be zero.
The zero tax rate generally applies to gains on sales of assets such as stocks, bonds, and mutual funds that you owned longer than a year. Qualified dividends, which include dividends on most US stocks, are also eligible.
Though the zero percent tax break becomes effective January 1, 2008, you can start planning now. For instance, it may be beneficial to wait until 2008 to sell appreciated stocks.
Some of the tax deductions mentioned above are not deductible for alternative minimum tax. If this applies to you, a different tax strategy may be required. Consult your CPA for the specific tax strategy to minimize your tax. Also, consider the tax impact of 2007 and 2008 tax years together. It may be best to pay more tax for 2007 if you expect to be in a higher tax bracket in 2008. Again, consult your CPA for the best tax strategy. December is always a good month to see your CPA.
I published a previous article on year end tax planning. See Year End Tax Planning for additional ideas. So much has changed in the tax code with expiring tax provisions and new tax provisions, that an update for 2007 was required.