Introduction to Year-End Tax Strategies

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Sell stocks to realize losses on stock while substantially preserving investment position (capital losses in excess of capital gains of more than $3,000 can be claimed in later years), or defer gain on stocks with a short sale to be closed early 2008, subject to restrictions imposed by the constructive sale rules.

Sell stocks to realize gains on stock to off-set excess capital losses you may have. You can only take $3,000 of capital losses in excess of capital gains in any year; any additional “excess capital losses” will be carried into future years.

If you have low income in 2007 (or have a loss), consider converting any traditional IRAs into Roth IRAs.  Many individuals have large IRA accounts and will someday have to pay income taxes on these balances, whereas proceeds from Roth IRA accounts are not subject to income tax.  Taxpayers whose modified Adjusted Gross Income (AGI) doesn’t exceed $100,000 can convert non-Roth IRA amounts to a Roth IRA and pay those income taxes with their current year’s income tax return.  If your income is low this year, or your retirement portfolio is “temporarily” down, this may be a great opportunity… and you have 60 days to reverse your decision if the market drops lower.

If you are not contributing the maximum amount into a Company-sponosored tax-deferred retirement account (ie 401 (k) plan), if you have the funds available, check to see if your employer will allow you to “catch up” for the current year.

Note that you have until April 15th, 2008 to contribute to your traditional IRAs for 2007, and that the maximum amount is $4,000 with an additional $1,000 “Catch-Up” amount for taxpayers age 50 or older. If you can participate in an employer retirement plan, your AGI may not allow an IRA deduction.

Consider year-end charitable gifts.  Note that there are extra tax benefits to giving appreciated property (i.e. stock or property).  Call if you may be interested in this.  Remember to donate your clothing and household items to a charitable organization since “non-cash” contributions are deductible if you itemize.

Pay estimated State income taxes this year (in 2007). Although State income taxes are itemized on Schedule A, they are also an AMT item and the benefits to this strategy may be limited.

Apply bunching strategy to Schedule “A” itemized deductions to increase deductible amounts (especially if you are close to the standard deduction amount or to any of the AGI limitation floors, i.e. 7.5% of AGI for medical expenses, 2% of AGI for miscellaneous deductions).

Increase payroll withholding to reduce or eliminate estimated tax penalty.

Dispose of passive activity to free up suspended losses (i.e. When you sell a rental property, any related suspended passive losses that have been accumulated will be used in the calculation of the property’s gain or loss).

Watch out for marriage penalty in planning a year-end marriage or divorce.

If you are planning on buying a hybrid car, there may be tax benefits to purchasing during 2007.  Related tax credits are subject to phasing out after a pre-determined number of the vehicles are sold, so please seek a consultation first.

Make energy efficient upgrades. You can get a one-time tax credit of up to $500 for projects that involve the home's shell (insulation, windows, sealing) or its home heating and cooling equipment. Each project must meet specific criteria. Eligible projects include new windows (10% of the cost, up to $200), central air conditioners (up to $300), hot water boilers (up to $150) and pigmented metal roofs (up to $500). This credit is scheduled to end after 2008.

If your employer provides flexible spending accounts, sign up before December 31st.  Also take advantage of tax-deferred retirement accounts (ie Company-sponsored 401(k) plans).  Consider contributing the maximum allowed to defer income into the future.

Circular 230 Disclosure:  This is to advise you that, unless expressly stated, nothing in this communication (including any attachment or other accompanying materials) was intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties, or for promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to anyone.