Tax Time Tune-Up
by Luke Norris
My grandfather always stressed the importance of planning ahead. Whether it was getting the oil in my car changed or an annual check-up on the furnace, he instilled in me the value of being prepared, saying, “It’s better to invest the money now than to pay for it on the backside.”
If there’s one time of year I pay particularly close attention to his advice, it’s now.
Tax season is around the corner, but there’s still time to plan ahead and positively impact your overall tax situation. Before you make any changes though, seek the advice of a trusted tax professional who can help you “tune-up” your tax strategy and end-of-year planning. Simply put, don’t look at your tax situation through a one-year lens, because what seems advantageous to you today, could cost you money in years to come.
Keep in mind these four tax and financial tips as you prepare for year’s end:
Sell to save
Tax harvesting, or portfolio timing, is always important to consider this time of year. Review investments to determine if you can make capital losses work for you by offsetting any capital gains. In some situations, selling stocks and recognizing a loss can actually create a tax savings. But, consult your tax professional about “wash sale” rules because there are specific tax limitations associated with this strategy. Also, with the lower capital gains rates, your savings may not be as high as other tax strategies could yield.
Consider the kids
The Small Business and Work Opportunity Tax Act of 2007 provided assistance to small business owners, but it also included substantial changes that may impact high net worth individuals and their children. The “kiddie tax” limits the benefit of transferring unearned income to children, in order to take advantage of the zero percent capital gain rate that applies to taxpayers in the 10 and 15 percent income tax brackets. In 2007, unearned investment income in excess of $1,700 annually for children under age 18, will be taxed at their parents’ highest marginal tax rates. But in 2008, the kiddie tax rules will be expanded to apply to children under age 19, or under age 24 if the child is a full-time student. To defer or eliminate the tax on earnings, consider contributing to an educational IRA or a 529 college savings plan.
IRA ideas
There are two key factors to consider with an IRA. First, if you’re still working and ages 50 – 70 1/2 for a Traditional IRA, or age 50 or older for a Roth IRA, you may qualify to make an additional $1,000 “catch-up” contribution, bringing your total contribution for the year to $5,000. Second, if you’re at least age 70 1/2, you may transfer up to $100,000 tax-free from an IRA directly to a qualified charity. This counts toward your required minimum distribution, so even though you can’t claim a charitable deduction, the distribution is not included in your taxable income. For your 401(k) or other employer-sponsored retirement plan, don’t forget to evaluate your elective contribution. Many companies will simply carry over your same contribution election to the next year, so now is the time to consider any changes to be made. Also, small business owners should review their options for personal retirement savings and learn how these contributions can reduce their tax bite.
Ballpark your burden
Estimating your tax liability before year’s end, or on a quarterly basis if you’re self-employed, is critical to making necessary adjustments. Taxpayers often overlook capital gains from investment sales, dividends, and income from partnerships or other sources, so doing a periodic check-up is key and may save you an underpayment penalty. To learn more about these and other preventative steps you can take to minimize your tax liability before the year’s end, contact your tax and financial advisor.
Luke Norris is Business Development Manager, H&R Block Specialty Tax Services Group.
P | 816.854.4212
E | luke.norris@hrblock.com