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Tax-saving tips
Part I of Jeff Francis’s year-end tax tips


This year, your tax planning involves predicting the future. There’s a good chance, according to many, that we will see an increase in taxes next year. You could find yourself in a higher bracket. If that happens, strategies such as deferring income and accelerating deductions would be just the opposite of what you should be doing — making it all the more important to discuss with your tax advisor any moves you might be considering.

With that fact in mind, here’s a look at some steps to consider taking before Dec. 31 to keep your tax bill as low as possible.

Defer income

It’s usually better to pay taxes later rather than sooner. Following that approach, you should try to postpone receipt of any income that you can until next year. Unfortunately, for many taxpayers, there is little room to maneuver.

Professionals and self-employed individuals who operate on a cash basis may be able to push income forward into 2009 by delaying some year-end billings. However, salaried individuals should avoid this approach. The IRS is known to scrutinize bonuses that are payable at year-end but not received until the beginning of the next year.

Two other possibilities: If you have U.S. savings bonds that mature in late 2008, you can defer taxation of that income by waiting until 2009 to cash them. Although the bonds still will earn income, the tax on that income will not be due until April 15, 2010. And, if you have been thinking about taking a non-mandatory withdrawal from your IRA, you will delay paying tax on the withdrawal until 2010 if you wait until the new year to make it.

Accelerate deductions

If your marginal tax rate will be the same next year, paying deductible expenses now allows you to reduce your income (and your taxes) sooner. If you expect to be in a lower bracket next year, taking the deduction in 2008 is worth more to you because it protects income that is taxed at a higher rate.

Homeowners may want to make their January mortgage payment in December. Some states allow you to prepay some property taxes. If you are in the process of buying a home and can close by year-end, you may harvest additional write-offs if you itemize your deductions.

Some itemized deductions are available only when you cross a certain minimum threshold of expenses, usually measured by your adjusted gross income. For example, medical expenses are deductible only to the extent that they exceed 7.5 percent of AGI; certain miscellaneous expenses, 2 percent of AGI.

When you have some degree of control over when you incur and pay these expenses, you may be able to bunch themto allow you to cross the barrier and obtain a deduction for expenses that exceed the threshold.

For instance, if your medical expenses are likely to be near the threshold this year, try scheduling routine medical appointments before year-end. Similarly, bunch miscellaneous expenses, such as the cost of tax advice, custodial fees, professional dues and other work-related items, when you can.

What about the AMT?

The alternative minimum tax initially was established to make certain the highest-income taxpayers would pay at least some amount of tax. Unfortunately, many taxpayers who are far from rich are being hit by the AMT.

Congress has attempted to ease the AMT burden by adjusting exemptions from the tax annually, but, generally, later in the year. This year, the extension of higher exemption amounts was included in the financial rescue package.

Because of the complicated nature of the tax, it’s advisable to review your tax planning strategies in light of the AMT rules before making any moves.

Expired deductions revived

Certain tax breaks expired Dec. 31 of last year but, as with the AMT, were just extended through 2008, including:

• Above-the-line deduction for qualifying higher education tuition and fees

• Choice to deduct either state and local income taxes or state and local sales taxes

• Above-the-line deduction of up to $250 for certain out-of-pocket expenses for teachers and other educators

Next month we will be looking at year-end tax considerations for your investments, retirement plan contributions and charitable gifts.



Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this and other personal finance issues, call 865-971-2321.

 

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