Huddleston Tax Weekly

Here’s a recipe for holiday cheer: Sweeten your year-end portfolio update with tax savings. Just remember to start planning now to achieve the best result.

Here are strategies that can help:

• Wash sales. Thinking of selling a security before December 31 to take advantage of a capital loss? To make sure the loss is deductible, refrain from buying a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.

• Worthless stocks. For capital loss purposes, securities with no value are treated as if you sold them on the last day of the year. Your loss is generally the same as your cost.

  If you want to deduct worthless securities on your 2007 return, you’ll need to prove the security became worthless during the year and that it truly has no value. Not sure you can meet those requirements? Selling before year-end may be a better option.

• Stock donations. Giving appreciated stock to charity lets you avoid capital gains tax and claim a charitable deduction.

  In order to deduct the donation on your 2007 return, the gift must be complete. For certificates you endorse and present directly, the date of mailing or other delivery is considered the date of the gift. When your broker or the issuing company handles the transaction, the gift is complete when the stock is titled to the charity.

Tax law changes that will take effect in 2008, such as revised kiddie tax rules and a zero percent capital gains tax rate on certain asset sales, may also affect your year-end investment planning. Please call us for more guidance in your year-end tax review.

Huddleston Tax Consulting of Seattle & Bellevue

“Countdown” time is here again, with reminders everywhere pointing out how many days are left until anticipated events. While you’re marking your calendar, remember that countdown time is great for tax planning, too, because it means you can still implement strategies to reduce your 2007 tax bill.

Here are three actions for your to-do list:

1. Review retirement contributions. If you’re not on track to reach the maximum deferral allowable, consider increasing your contributions. Pre-tax retirement plan contributions reduce federal adjusted gross income – and your tax. 

   For 2007, you can contribute up to $15,500 to your 401(k), plus an additional $5,000 if you’re 50 or older by year-end. The maximum SIMPLE contribution is $10,500 (plus $2,500 if you’re over age 50).

2. Estimate tax liability. Figuring out whether you’ll be over- or underpaid now gives you time to adjust the income tax withheld from your wages for the year. As a general rule, to avoid penalties for underpayment you’ll need to prepay at least 90% of your tax liability for 2007.
3. Take advantage of expiring tax provisions. The nonbusiness energy property credit, which lets you claim a credit of up to $500 against your federal tax bill for certain energy-efficient home improvements, expires December 31, 2007. 

   December 31 is also the last date for making charitable donations of up to $100,000 from your IRA. If you’re age 70½ or older, these distributions may be nontaxable while satisfying your minimum annual withdrawal requirement.

Please contact us for additional tax saving ideas tailored to your circumstances.

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There are no time machines, so you can’t come back to today from the future. That’s one reason planning ahead is important — and why now is the time to think about what you can do before the end of the year to trim your business tax bill.

Here are three suggestions:

1. Take advantage of energy incentives. Making energy-efficient improvements to commercial business property by December 31 can garner a federal tax deduction. The maximum deduction is $1.80 per square foot.

   A partial deduction is available for improvements such as interior lighting and hot water systems that meet certain energy-savings targets.

2. Benefit from depreciation write-offs. Instead of waiting until January to upgrade computers or software, consider buying them now.

   For 2007, you can expense up to $125,000 of qualifying business assets. Though subject to limitations, the deduction is available whether you finance assets or buy them outright.

3. Plan for retirement. Establish and fund a qualified retirement plan before December 31 and you might be eligible for federal tax credits in addition to a deduction from your business income.

   The credit for small employer pension plan startup costs reduces your tax liability by as much as $500 in each of the plan’s first three years.

   You may also qualify for the qualified retirement savings contributions credit on your personal return, which can save up to $1,000.

Other tax-saving strategies include hiring family members and paying year-end bonuses.  Additional ideas are at http://huddlestontax.com/id13.html.  We’ll be happy to help you maximize business tax benefits. Give us a call.

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You already know the federal tax rate on capital gains varies, depending on your tax bracket, the kind of property you sell, and how long you owned it.

But are you aware that starting next year some capital gains won’t be taxed at all?

From 2008 through 2010, if your taxable income falls within the 10% or 15% tax brackets, the rate you’ll pay on your federal return for certain dividends and long-term capital gains will be zero.

The zero 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.

Note: Gains on sales of assets you owned for twelve months or less are still taxed at your ordinary income rate. Depreciation recapture and sales of collectibles remain subject to higher rates as well.

Though the zero percent break becomes effective January 1, you can start planning now. For instance, it may be beneficial to wait until 2008 to sell appreciated stocks in taxable investment accounts.

In addition, since expanded kiddie tax rules go into effect in January, it’s a good idea to review gifting plans before year end. Why? The new rules mean the investment income of your age 19 and younger dependent children (under age 24 for students) might be taxed at your rate in 2008. Preparing in advance can save tax dollars.

Other planning opportunities exist. Please contact us for more information.

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