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There are almost 300 tax-code changes worth $150 billion in the Emergency Economic Stabilization Act of 2008. While many of those perks are earmarks aimed at a narrow group, there's plenty in the bill to keep most taxpayers busy on their year-end planning.
We have not changed our rates since 2004 - and they are the same this year. So, no increase in what we charge for our services.
Plus, who could forget this was an election year?
The real action in year-end planning is listening to what the candidates have been saying. If you believe them, and believe the polls, then it's time for some defensive action in the last months of the year if you have capital gains.
That is, President Elect Barack Obama has said he'll raise the tax rate on capital gains and qualified dividends to 20% for taxpayers with an adjusted gross income of $250,000 or more ($200,000 for single filers), according to an analysis of the candidates' plans by the nonpartisan Tax Policy Center. Taxpayers below those income thresholds would continue to enjoy the zero and 15% rates in effect now.
For those in the higher tax brackets, this might be a good time to realize those gains and pay your 15% tax rate because you might be paying a higher rate next year if you wait. Even with the miserable performance of the market some people have gains. They're paying the 15%. Then, if they love the stock, they buy it back.
By the same token, it might be best to hold off on realizing losses unless you can carry them forward to next year because if the capital-gains rate does rise, your losses will be more valuable if they offset gains taxed at a higher rate.
As you do your tax planning, assess what your state is -- or is not -- doing. Some states aren't adopting federal law changes or are delaying them. States have been pulling back because of their budgetary issues. There may be some significantly different numbers.
Eligible for a Roth?
As you plan for next year, don't forget about inflation-related changes. For instance, workers whose salary has been stagnant may find they're eligible to contribute to a Roth IRA because the income limits rise next year.
Married-filing-joint taxpayers are ineligible to contribute to a Roth if they have a modified adjusted gross income higher than $176,000 in 2009, up from $169,000 this year. For singles and heads of household, the income limit is $120,000 next year, up from $116,000 in 2008. The maximum contribution to a Roth is $5,000 ($6,000 for those 50 and older). See related story on inflation adjustments.
Also, in 2009 people with a 401(k) or similar workplace plan can contribute up to $16,500, a $1,000 hike from this year's limit. And those 50 and over get a $5,500 catch-up contribution in 2009 (a $500 increase from this year's catch-up amount). Plus, the income limits on deductions of IRA contributions increase next year. See this IRS release for more information.
Perks extended
The bailout bill breathed new life into some expired tax perks, including an above-the-line $250 deduction for teachers, the higher-education tuition deduction, the state and local sales tax deduction, and making more taxpayers eligible for the child-tax credit, among other extender items.
The bailout bill also extended the AMT patch. The exemption amount for 2008 is now $69,950 for those filing jointly, $46,200 for single taxpayers and heads of household, and $34,975 for married-filing-separately. (The AMT exemption amount is similar to a deduction: It reduces the amount of income subject to the AMT.)
Experts advise taxpayers to assess first whether they're likely to fall into the AMT before making tax-related plans, because many deductions are not available under that parallel tax. See archived story (note the AMT exemption amounts have changed).
Time to give
The bailout bill also extended a perk for wealthier older taxpayers who don't want to face the tax hit from a required minimum IRA distribution.
The tax perk allows taxpayers 70 1/2 or older to send up to $100,000 from their IRA to a charity income-tax free; it expired at the end of 2007, but the rescue plan reinstituted it for 2008 and 2009.
While you're in the giving mode, consider gifting investments that have declined in value but for which you still show a gain. Now is a great time to do gifting and estate planning.
Maybe you have blue chip stocks that have been temporarily down in value ... they can transfer a lot more shares today at that low value then they could if they wait until it goes back up. You want to give investments that are likely to rise in the future.
Homeowners' decision
Thanks to the Housing Assistance Tax Act of 2008, homeowners can choose between itemizing and taking the standard deduction -- which now includes a new "standard deduction" for property taxes.
As part of the bailout bill, Congress extended this tax break through 2009.
The regular standard deduction is $10,900 for married-filing-jointly filers in 2008, plus another $1,000 for the property tax deduction. For single filers, the standard deduction is $5,450, plus another $500 for the property tax deduction.
If your itemized deductions total about the same amount as the standard deduction plus this new property tax perk, consider pushing other deductions into next year. That way, you can claim the bigger standard deduction in 2008 and have more itemized deductions to claim next year.
Another potential quandary to consider: A new law earlier this year means that if you turn your vacation home into a principal residence after 2008, with the intent of then selling what is now your primary residence, you could miss out on the tax exclusion on a home sale.
If you were planning on selling your primary residence and moving into a vacation home, now might be a good time to do that, though obviously the current state of the housing market may play a bigger part than tax considerations in your decision.
Ready to buy?
If you're ready to buy your first home, your willingness to jump into this market will be rewarded. First-time buyers who purchase between April 9, 2008 and June 30, 2009 may be eligible for a refundable tax credit of 10% of the purchase price, not to exceed $7,500.
You can claim the credit in 2008 even if the purchase happens in 2009, so you don't need to accelerate the purchase to get the credit.
The credit starts to phase out for taxpayers with modified adjusted gross income of $75,000 and is not available to those who earn more than $95,000. For married-filing-jointly filers, the phase-out starts at $150,000 and credit is gone at modified AGI above $170,000.
Energy efficiency -- but not this year
If you heard that the rescue plan extended tax credits for energy-efficiency home improvements, be careful. That did happen, but the tax credit isn't effective until 2009, so hold off on that new insulation, replacement windows, skylights and doors and other eligible home improvements if you want the tax credit.
Lawmakers skipped over 2008. Clients who were assuming it would be extended and put in new energy-efficient windows and doors in 2008 will not get the credit. It's good for 2007 and 2009. (This credit, worth up to $500, is a lifetime credit so if you received it in a previous year you're out of luck.)
Don't confuse that tax credit with another one related to energy efficiency: The Residential Energy Efficient Property credit applies to taxpayers who install solar power, fuel cell equipment or make other qualified expenditures that produce energy for home use through 2016 and applies to your main residence and your vacation home.
Tax rate: Zero
Too bad it wasn't a year when investments soared: If you're in the 10% or 15% tax bracket, capital gains and qualified dividends are tax-free this year (and through 2010 under current law). The catch: To be eligible for this perk, your taxable income must be $32,550 or less for single filers, $43,650 or less for heads of household, and $65,100 or less for joint filers.
Because this tax break is tied to taxable income, not adjusted gross income, making year-end charitable contributions or otherwise increasing itemized deductions can raise your eligibility for tax-free capital gains.
Kids and taxes
Considering that attractive zero percent rate, you might think it makes sense for your children to sell some investments, but be wary of changes to the kiddie tax that apply in 2008.
The kiddie tax this year applies to children through age 18, and through age 23 if they're full-time students. In general, that means their investment income above $1,800 is taxed at their parents' top rate, so do not have them sell at a gain on the expectation that their lower income will get them the tax-free capital gain treatment.
The incentive for [taxpayers'] children to implement their own year-end tax planning moves to reduce their net investment income can be as great as yours.
The kiddie tax rules don't apply to children whose earned income exceeds half of the amount of their support.
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