Financial Abundance

While it is important to execute year-end tax saving strategies to minimize your taxes in 2009, your greatest opportunity for tax savings comes from advanced tax planning before the start of 2010.  There are several areas where advanced planning will provide a significant amount of tax savings in the year ahead.  Here are just a few:

Purchasing a home – Congress has extended the $8,000 refundable tax credit to anyone who closes a “first home” by the end of June 2010.  This “first home” credit applies also to anyone who has not owned a house for the past three years.  If you have a home that you have owned for at least five years, you are eligible for a refundable tax credit of $6,500, as long as your new home costs less than $800,000.  To qualify for either option, income cannot exceed $225,000 for joint tax filers.

A refundable tax credit provides for a full tax refund of either $8,000 or $6,500, even if the taxes that you owe are less than the refund amount.  As an example, suppose that you owe taxes of $5,000 and are receiving a refundable credit of $8,000.  With a refundable tax credit, you pay no taxes at year end and the treasury will send you a check for $3,000.

If you have not owned a home in three or more years or are thinking about moving after living in your home for at least five years, these subsidies can help you buy a new home.  Just be sure to sign a purchase agreement by April 30 and that closing occurs by June 30.

Health Savings Accounts – If you choose a qualified High Deductible Health Plan (HDHP) for your family’s health insurance in 2010, you will be able to make a tax deductible contribution of $5,950 to your Health Savings Account.  Not only are these funds immediately deductible against 2010 income, when you use these funds for future health care, no taxes are due on these funds or their income.

HSAs combine an immediate tax deduction (like an IRA) with the advantage of never paying taxes on these funds (like a Roth IRA), when the HSA funds are used for health care services.  On an after tax basis, HDHP insurance plans, combined with fully funded HSAs are often the most cost effective approach to providing health insurance.

Sales Tax Deduction – For the past few years, Congress has allowed for taxpayers to choose between deducting their state and local income taxes or their annual sales taxes. In states such as Colorado, most people deduct the income taxes.  However, if you are retired or having a low income year, it may be more advantageous to deduct state and local sales taxes instead of income taxes.

My approach is to have a large jar in the pantry into which my wife and I put every receipt with at least $1 in sales taxes.  At the end of the year, you might be surprised to find out how much you pay in sales taxes.  As an example, if you buy $80,000 in taxable items, you pay $6,800 with Colorado’s 8.5% sales tax,.  With Colorado’s 4.64% income tax rate, $145,000 of taxable income is required for the same $6,800 deduction.

IRS provided sales tax tables vastly understate actual sales tax payments.  For the sales tax alternative to succeed, you must save your sales tax receipts.  However, a little effort at the end of the year could save hundreds of dollars in federal income taxes.

Other tax savings approaches include maximizing your retirement plan savings, properly funding your flexible spending account (FSA), gifting strategies, etc.  To get more detail on these and other tax strategies, check out my book, Financial Abundance Guide, which is now available free on my website.

• » Comments (0)

One of my Seven Steps to Financial Abundance is “minimize your taxes.”  As 2009 draws to a close, there are several ‘to do” list items that can help assure that your 2009 federal and state taxes will be as low as possible. Let’s look at ten actions that could lower your 2009 taxes, if they are performed by December 31.

1.    New Car Purchase – If you were unable to take advantage of “cash for clunkers,” but are still planning on a new car purchase, do it now.  If you buy a new vehicle by December 31st, you can deduct state and local sales taxes from your 2009 federal tax return, regardless of whether you itemize or not.  This deduction applies to the first $49,500 of a new car price and phases out for couples earning over $250,000.
2.    Capital Loss Deduction – Determine if you have realized any 2009 capital gains in your taxable investment accounts.  If so, assuming that the taxable accounts have assets that are valued at less than their purchase price, sell enough of these capital loss assets to have a net realized capital loss of $3,000 in 2009.  This $3,000 capital loss will offset other 2009 income.
3.    401(k) and 403(b) Plans – Maximize your 401(k) and 403(b) contributions before year end.  In 2009, the maximum tax deductible contribution for each plan is $16,500.  If you are over age 50, you may make a “catch up” contribution of $5,500 for a total of $22,000.  If it is too late to increase your allocations for 2009, be sure to sign up for the maximum reduction that you can afford in 2010.
4.    Roth IRA Conversions – If your modified Adjusted Gross Income (AGI) for 2009 is less than $100,000, you may convert IRA holdings into a Roth IRA.  While the AGI limitation will disappear in 2010, if your 2009 income is lower than normal, it may be wise to convert some IRA funds before the end of 2009.
5.    IRA Charitable Contributions – For those over age 70½, 2009 is the last year in which you can make direct charitable donations of up to $100,000 from your IRA.  If you withdrew this money and then gave it to a charity, your AGI would increase, which could trigger future Medicare premium increases.
6.    Charitable Gifts –If you are inclined to help those less fortunate than yourself, charitable giving will help reduce your taxes.  Any tangible items that you donate must be in at least “good” condition.   Keep a detailed list of the items, their condition and the thrift store value of each item.
7.    Set up a Donor Advised Fund – If your charitable gifts are in cash, consider establishing a Donor Advised Fund.  You can donate long-term appreciated capital assets to the Donor Advised Fund and receive a deduction for the full value of the asset.  Not only will you receive a charitable tax deduction, you will never pay taxes on your capital gains.
8.    Defer Income – The self-employed and some small business owners can elect to invoice customers in January, so they don’t have to include this income in 2009.  However, this may only be wise if you will be in the same or lower tax bracket in 2010.
9.    Adjust Medical Deductions – Since medical deductions are limited to expenses exceeding 7½ % of income, if you have already had high 2009 medical expenses, get any tests, eyeglasses, prescriptions or dental work that you may require during 2009.  If your 2009 medical expenses are low, hold off on these expenses (if possible) until 2010.
10.    Prepay mortgages and state income taxes – If your mortgage payment is due January 1, paying it by December 31 will allow you to deduct the interest in 2009.  Prepaying your state income tax by December 31 will also allow the amount paid to be deducted in 2009.

There are other methods of reducing your 2009 taxes, such as IRA and HSA contributions, that do not require action by December 31.  However, the actions listed above must be done by December 31 if you wish them to apply to your 2009 taxes.

• » Comments (0)

Is it better to contribute to a traditional, deductible IRA or to a Roth IRA?  As with most personal finance questions, the answer is “it depends.” Let’s look at some guidelines to help you decide.

With a traditional IRA, contributions can only be made if you are under 70½ years old and you and/or your spouse have earned income. The maximum contribution is the lesser of $5,000 ($6,000 if over age 50) or the total amount that you and/or your spouse earned.  If you have a qualified retirement plan, the full amount can only be contributed if your Modified Adjusted Gross Income (MAGI) is no more than $55,000 as a single tax payer or $89,000 as a joint filer.

With a Roth IRA, your Adjusted Gross Income (AGI) must be less than $105,000 as a single filer or $166,000 as a joint tax filer plus you and/or your spouse must have earned income.  Like a traditional IRA, the maximum contribution is the lesser of $5,000 ($6,000 if you are over age 50) or the total amount that you and/or your spouse earned. If deductible IRA contributions are made, the amount that can be contributed to a Roth IRA is further reduced by the amount contributed to a deductible IRA.

The decision on which IRA to use is sometimes obvious:

1. A single filer with an AGI over $105,000 or a joint filer with an AGI over $166,000 who is not covered by a retirement plan can only fund an IRA.
2. If covered by a company retirement plan with a MAGI of over $89,000 but less than $166,000 as a joint filer or over $55,000 but less than $105,000 as a single filer, only a Roth IRA can be fully funded.
3. If you reach 70 ½ and have earned income, only a Roth IRA can be funded.
4. When saving to buy a first home, only with a Roth IRA can up to $10,000 of growth and income plus all contributions be withdrawn, tax and penalty free.

The following are more subtle advantages of Roth IRA plans:

1. For those under 40, the tax free growth combined with the tax free withdrawal of the funds (after age 59½), typically make the Roth IRA a better investment.
2. If funds are required before reaching age 59½, a Roth IRA allows the withdrawal of all contributions, with no taxes or penalty on this withdrawal.
3. For older individuals, a Roth IRA is an excellent way to pass funds to younger generations. The younger recipient may allow these funds to continue to grow tax free by withdrawing inherited Roth funds tax free over their lifetime

When none of the above apply, the decision of funding a Roth IRA or a traditional, deductible IRA must be made by analyzing your current tax bracket, what you believe will be your future (retirement years) tax bracket and whether you expect to consume the retirement funds or pass them to future generations.  If you need help making this decision, consult with your financial planner or tax adviser.

• » Comments (0)

In 2006, the Pension Protection Act was signed into law.  A key provision of that act was the elimination of the $100,000 earnings ceiling for an IRA to Roth IRA conversion.  Until now, only taxpayers with an Adjusted Gross Income (AGI) of $100,000 or less have been allowed to convert funds from their IRA accounts into a Roth IRA account.  However, thanks to this 2006 legislation, on January 1, 2010, anyone may transfer funds from an IRA account to a Roth IRA, regardless of income.

When IRA funds are converted to a Roth IRA, taxes must be paid on the amount of (pre-tax) IRA contributions that are converted.  However, another “gift” from the Pension Protection Act of 2006 is the ability to delay this tax liability on funds converted in 2010.

In 2010, if you convert $100,000 of taxable assets from your IRA to your Roth IRA, you may choose to pay taxes on an additional $100,000 of income for tax year 2010.  However, you also have the option of paying no additional income taxes on the converted amount in 2010.  Instead, you may pay income taxes on ½ ($50,000) of the income in tax year 2011 and on ½ in tax year 2012.

After 2010, you may continue to convert IRA funds to Roth IRA funds, regardless of income.  However, from 2011 on, taxes on the converted taxable amount must be paid in the tax year during which the conversion is made.

Are there any reasons to not use the three year option for a 2010 Roth conversion?   An obvious reason would be if you have very little income in 2010 and expect significantly more income in 2011 and 2012.  A less obvious reason may be the possibility of future federal income tax increases.

The current administration has proclaimed that it will raise taxes on the “rich,” which it defines as couples with incomes of $250k or more.  One way this will be accomplished is by allowing the current “tax cuts” to expire at the end of 2010.  When these tax cuts expire, income taxes on all income level will rise in 2011 and beyond.

Since 2010 is an election year, congress may not be anxious to pass additional tax increases in 2010.  However, with our enormous and increasing budget deficit, a tax increase in 2011 appears likely. Depending upon your expected income in 2010 – 2012, you could pay less in taxes on your IRA to Roth IRA conversion by declaring the full amount of income in 2010, especially if income taxes increase dramatically in 2011 and beyond.

If you are considering retirement in the near future, it may be beneficial to retire at the end of 2010.  This could allow you to convert a substantial amount of IRA savings into a Roth IRA.  With the three year option, the Roth conversions would be taxed in 2011 and 2012, when work related income has ceased.  This approach could minimize the amount of taxes owed on the Roth IRA conversion.

Do not do an IRA to Roth IRA conversions without having enough funds, outside of the IRA, to pay the taxes owed.  If the taxes are taken out of the IRA, advantages of a Roth conversion will be substantially lost.  When IRA funds are used to pay the taxes owed on the conversion: 1) taxes are paid on funds being used to pay taxes 2) If you are under 59 ½, a 10% penalty will be assessed on IRA funds that are used to pay taxes and 3) the tax deferred and tax free account funds are reduced in value by the amount of taxes and penalties paid.

2010 provides an opportunity for millions of new taxpayers to consider the advantages of converting IRA funds into a Roth IRA.  If you are unsure of whether this conversion would be beneficial, talk to your financial planner or tax account and ask them to help you make this determination.

• » Comments (0)

As your children (or grandchildren) head back to school, you may be wondering how you will ever afford their college education.  A four year education in a public university costs approximately $55,000 and a degree from a private university costs $132,000. 

In 15 years, these costs are estimated to rise to $316,000 for four years at a private university and $133,000 for a public university.  Since educational expenses are not tax deductible, with a combined state and federal tax bracket of 35%, the required before tax income to pay for these expenses is $486,000 for a private college and $205,000 for a public college.

Let’s look at two approaches to college savings where Uncle Sam can help pay these huge expenditures.

529 College Savings Plans – 520 College Savings Plans allow for a parent, grandparent or other family member to set up a plan for each child.  An individual may provide up to $13K annually or a couple can fund up to $26K annually for each child’s plan, using the annual gift tax exclusion.  A unique aspect of the 529 plan is the ability to pre-fund up to five years ($130K for a couple or $65K for an individual) when the plan is established.  

The investment growth in a 529 plan is not  taxed.  As long as the funds are eventually withdrawn for higher education expenses, associated with a college or graduate school, the 529 investment and its growth can be withdrawn tax free.

As an example, assume your daughter is just entering 1^st grade.  Wishing to help pay for their granddaughter’s education, your parents put $100K into a 529 savings plan, with their granddaughter named as the beneficiary.  Assuming an 8% annual return on the 529 plan, when your daughter enters college, the 529 plan will have $252K available for college expenses.  If your combined federal and state tax bracket is 35%, the tax free withdrawal of 529 funds could save as much as $53K in income taxes.

529 plans offer great flexibility to the person who funds the plan.  In the example above, if the granddaughter decides to go to a public university and does not require the full amount remaining in her plan, the grandparents can change the beneficiary to another grandchild, who could then use the remaining 529 funds for their higher education.  The grandparents can even provide the remaining funds to grandnieces or grandnephews.

With a 529 plan, you must choose your investments from the investment options offered by the plan administrator.  However, the plan owner (funder) can change investment options once every 12 months.  If a better plan becomes available, you can even transfer the fund assets to a different plan as often as once per year. 

Coverdell Education Saving Accounts – Another way to fund educational expenses is through the Coverdell ESA.  Contributions to a Coverdell ESA can be made for any child, under the age of 18.  The maximum funding per child, regardless of the funding source, is $2,000 per year.  Thus, a family with five children can put aside a maximum of $10K per year into the Coverdell ESAs.

Similar to the 529 plans, all growth and income in a Coverdell ESA is never taxed, as long as the funds are withdrawn for qualified educational expenses.  Unlike the 529 College Savings plan, the Coverdell ESA funds can also be used for K-12 educational expenses.   Also, Coverdell ESAs can only be fully funded by individuals with annual income below $95K and couples with income below $190K.

If there are funds remaining in an ESA account, the Coverdell ESA funder may transfer funds from that ESA account into another ESA account as long as both account holders are under age 30.

If funds are not used for qualified educational expenses Coverdell ESAs and 529 plans have severe tax consequences.  In both cases, the income is taxed as ordinary income plus a 10% penalty amount is applied to the income.   However, the flexibility to transfer funds to other family members and the significant tax savings make both plans attractive to any family that is facing the significant costs of higher education.  

• » Comments (0)

There is a simple, easy to use tax reduction tool, currently available to 90% of all US taxpayers.  In 2010, this tool will be available to everyone.  Unfortunately, only 19% of all taxpayers currently take advantage of it.  Do you know what it is?

If you guessed the Roth IRA, you’re correct.  Like a traditional IRA, a Roth IRA is a personal savings account in which funds grow tax free.  Unlike a traditional IRA, when Roth IRA funds are withdrawn, in a qualified withdrawal, no taxes are due on either the funds or their investment growth. 

With the growing federal deficit, it is probably safe to assume that your tax bracket in retirement will be close to your present tax bracket.  If so, the Roth IRA will always yield a higher after tax return than a traditional IRA.  This holds true even when if you invest the tax savings from your traditional IRA contribution.    

Another advantage of a Roth IRA is that there are no mandatory distribution requirements.  With a traditional IRA or a 401(k) plan, you must begin taking withdrawals and paying taxes on the withdrawn funds at age 70 ½, even if you do not need these funds.

Because there are no mandatory withdrawal requirements with a Roth IRA, they can be an excellent estate planning tool.  If you do not need your Roth IRA funds during retirement, the Roth IRA funds can be passed to your heirs.  The inherited Roth IRA funds remain income tax free when withdrawn by your heirs.  An inherited Roth can have a mandatory distribution schedule that is based on the expected lifetime of the heir.  This allows most of the Roth IRA funds to continue to grow tax free throughout a second lifetime. 

If you earn less than $105,000 as an individual tax filer or less than $166,000 as a joint filer, you can annually contribute up to $5,000 ($6,000 if age 50 or over) to a Roth IRA, even if you are covered by a qualified company retirement plan. 

Many financial advisors recommend that you put the maximum amount possible into a tax deferred retirement account, such as a 401(k) or 403(b).  However, it is often wiser to put the maximum amount that your company will match in the tax deferred retirement account and put the next $5,000 ($6,000 if age 50 or over) of retirement savings into a Roth IRA. This approach will maximize your after tax retirement funds and maximize your withdrawal options during retirement.

Converting tax deferred funds from a traditional IRA or 401(k) to a Roth IRA is often wise, especially if you may not need all of your tax deferred funds during retirement.  Currently, if your annual income (AGI) exceeds $100,000, this type of conversion is not permitted.  However, this income limitation for a Roth IRA conversion will soon disappear.  

Starting in 2010, everyone will be able to do a Roth IRA conversion, regardless of income level.  With a Roth IRA conversion, you must pay current taxes on the amount converted.  Once these funds are converted, you never pay income taxes on these funds and their investment gains again. 

There is an additional incentive to convert funds to a Roth IRA in 2010.  Taxes owed on funds converted in 2010 can be spread over two tax years.  In 2011 and beyond, 100% of the conversion taxes must be paid in the year of the conversion.

A Roth IRA conversion should only be considered if you have adequate additional savings to pay the taxes due without using the converted funds.   If you will need any of the converted funds within five years, do not convert these funds.  Funds withdrawn within five years will likely be considered a non-qualified distribution, requiring the payment of a 10% penalty on any funds withdrawn.

With the enormous expansion of government debt, it seems likely that income and capital gain tax rates will soon rise.  Whether you are eligible now, or must wait until 2010, the benefits of having a Roth IRA should be considered as part of your personal financial plan.  

• » Comments (0)

Would you like to discover a way to reduce your 2008 taxes? Funding an IRA between now and April 15 is one of the few remaining methods to reduce last year’s taxable income. Let’s look at three popular IRAs to determine if a year-end contribution is appropriate for you.

For someone who is self-employed, a SEP IRA is often the best way to reduce your taxable income and save for retirement. If your company is an S or C Corporation, you can contribute up to 25% of your W-2 income to a SEP IRA. With a sole proprietorship or an LLC your maximum contribution is 20% of your income. In either case, the maximum annual contribution is $46,000 for 2008.

If you have any employees, you must contribute the same percentage of income for any employee that is over 21, has worked for you for at least 3 years and receives at least $550 in annual compensation.

If you have no self employment income, you may be able to contribute to a traditional, deductible IRA or to a Roth IRA. To determine if you qualify for an IRA contribution, let’s look at the rules for each type of IRA.

To contribute to a traditional IRA, you must be under 70½ years old and you(or your spouse) must have earned income. In 2008, your maximum IRA contribution is $5,000 ($6,000 if you are over age 50).

If you are covered by a company retirement plan, you can deduct the maximum amount when your Adjusted Gross Income (AGI) is no more than $53,000 as a single tax payer or $85,000 as a joint filer. If your spouse has no earned income, they can contribute the maximum amounts to their own IRA, even when you are covered by a company retirement plan, as long as your AGI is under $159,000.

To contribute to a Roth IRA, your Adjusted Gross Income (AGI) must be less than $101,000 as a single filer or $159,000 as a joint tax filer. Your maximum Roth IRA contribution is $5,000 ($6,000 if you are over age 50). However, if you make any traditional IRA contributions, the maximum Roth contribution amount is reduced by the amount that you contributed to the traditional IRA.

Based on IRS rules, the decision on which IRA to fund is often obvious:

1. If you are not covered by a company retirement plan and, as a single filer have an AGI over $101,000 or as a joint filer have an AGI over $159,000, you can only fund a traditional IRA.

2. If you are covered by a company retirement plan and your AGI is over $85,000 but less than $159,000 as a joint filer or over $53,000 but less than $101,000 as a single filer, you can only fully fund a Roth IRA.

3. If you are over 70½ and have earned income, you can only fund a Roth IRA.

Funding a Roth IRA has the following advantages over a traditional IRA:

1. When buying your first home, a Roth IRA allows the withdrawal $10,000 of growth and income plus all of your contributions, with no taxes or penalties on the withdrawal.

2. For people under age 40, the tax free growth and withdrawal of funds during retirement often make Roth IRA contributions a better, after-tax choice.

3. When funds are required before age 59½, a Roth IRA typically allows the withdrawal of Roth contributions with no taxes or penalties on the withdrawal.

4. A Roth IRA in your estate is an excellent method of passing tax free funds to younger generations.

If there are no compelling reasons to chose a Roth over a traditional IRA, decide on whether you wish to reduce your current taxes with a traditional IRA or reduce your taxes during retirement with a Roth IRA.

• » Comments (0)

In early December, I made sure that all of my asset management clients received a Christmas present. However, they will not be able to open it until April 15. In this article, I will show you how to give yourself the same present, which could be worth $1,000 or more.

I am not aware of any investor who has not suffered substantial losses in 2008. The one bright side of investing losses, is that up to $3000 in net capital losses can be deducted from your 2008 taxes. If you are in the 28% federal tax bracket and the 5% state bracket, your total tax savings would be approximately $1,000. The savings is even more if you are in a higher tax bracket.

Many investors are buy and hold investors. While this investing approach defers capital gains taxes when markets are up, strict adherence to such an approach could cost you tax dollars in 2008. Here is a simple way give yourself a 2008 tax reduction.

For each of your taxable brokerage accounts, go on-line or call your broker to determine what your realized capital gains/losses are for 2008. If your realized capital losses, in all of your taxable accounts, is greater than $3,000, no further action is required. However, if you have realized capital gains in these accounts, you must take some action.

Review your taxable portfolio to determine which stocks or mutual funds are are most concerning. Pick one or more of these assets and determine its unrealized capital loss. If this loss is at least $3,000 more than your current realized gains, sell it by December 31 to claim your $3,000 tax loss. If your loss is still not at least $3,000, pick your next least favorite stock or mutual fund, until you have at least a $3,000 net loss.

If you own mutual funds, immediately call each fund company to determine if they will be making a capital gain distribution in 2008. Even though virtually all mutual funds are down in 2008, some will be adding insult to injury with the requirement that they pay out all capital gains by the end of the year. If your fund will pay out capital gains, either sell it or be sure to include the capital gains amounts in the above calculations.

If you want to maintain your current asset allocation after you sell a stock or mutual fund, look for a similar type of stock or fund with better financial prospects in 2009 and beyond. While I never recommend that investors make investment decisions strictly on the basis of tax savings, now is the time to take a close look at your investment portfolio. You will be a fairly unique investor if none of your stocks or mutual funds are of concern in 2009 and beyond.

If this strategy makes sense to you, I hope that you enjoy this Christmas present, even if you have to wait until April to open it.

• » Comments (0)

For most of us, 2008 has not been a good year for our finances. One way to maximize your financial abundance is to avoid paying more in taxes than you should. With the end of 2008 rapidly approaching, let’s look at some actions that can lower the amount of taxes that you will owe on April 15, 2009.

1. Capital Loss Deduction – If you have any investments in taxable accounts, you likely have unrealized capital losses in 2008. Before year end, determine if you have realized any capital gains for 2008. If you have not sold any investments at a loss this year, it may be wise to sell enough to assure that your net realized capital losses are at least $3,000 in 2008. This $3,000 loss can be used to offset other income that you report for 2008.

2. Mutual Fund Capital Gains – With the markets off 40%, you might think that you will receive no capital gain distributions from your mutual funds in 2008. However, many mutual funds will be making a capital gain distribution in December. If you have mutual funds in your taxable accounts, call the mutual fund company and ask if they expect to make a capital gain distribution. If so, either sell the fund before the distribution date or be sure you have other capital losses to offset any gains received.

3. 401(k) and 403(b) Plans – Maximize your 401(k) and 403(b) contributions before year end. The maximum tax deductible contribution for each plan is $15,500 in 2008. However, if you are over 50 you may make a “catch up” contribution of an additional $5,000 for a total of $20,500. If it is too late to do this for 2008, be sure to sign up for the maximum reduction that you can afford in 2009.

4. Roth IRA Conversions – If your modified Adjusted Gross Income (AGI) for 2008 will be less than $100,000, you are eligible to convert your current IRA holdings into a Roth IRA. Roth IRA funds will remain tax free for both your lifetime and the lifetime of your beneficiaries. While you will be required to pay taxes on the amount converted, with the markets down, this may be an ideal time to convert. Check with your financial advisor or CPA to see if this is an appropriate strategy for you.

5. Charitable Gifts – In rough financial times, it is often hard to remember that many people are experiencing much worse financial pain than we are. If you are inclined to help those less fortunate than yourself, charitable giving can also help reduce your taxes. If you give away items, be sure that all items are in at least “good” condition. Also, keep a detailed list of the items, their condition and the thrift store value of each item. If you have a required IRA distribution that you must take by year end, consider a direct rollover of the amount required to your favorite charitable organization.

6. Donor Advised Funds – If you are going to provide cash charitable gifts in 2008, you might consider setting up a Donor Advised Fund. If you have long term capital assets which have appreciated since you purchased them, you can donate the asset to a Donor Advised Fund account and receive a deduction for the full value of the long term asset. Not only do you get this charitable tax deduction, you will never pay taxes on your capital gains.

7. Year End Gifts – For people with large estates who are worried about eventual “death (estate) taxes” you can annually give up to $12,000 ($24,000 for a couple) to any individual. For a wealthy couple with 3 children and 7 grandchildren, $240,000 can be removed from their taxable estate every year. While this saves no current year taxes, it could substantially reduce eventual estate taxes.

There are other methods of reducing your 2008 taxes which do not require action by the end of the year. These will be addressed future articles. If any of the above ideas apply to you, do not procrastinate. If you do not complete these actions before December 31, you will not be able to use them in 2008.

• » Comments (0)