December Newsletter 2008
Posted: 12/15/08
Dear Client,
We keep you informed. This letter discusses the tax changes this past year, scheduled changes according to current law and potential changes for the future.
Future Tax Landscape: Tax policy experts in Washington have generally agreed on the following two scenarios for the future.
Scenario #1: The new President/Congress could raise the tax rates on the top two individual tax brackets from 33% and 35% up to around 36% and 39% for the year 2009. Long term capital gain rates could be increased to 20%. If the president enacts this tax increase, it is likely the law will be passed retroactive back to January 1, 2009 to prevent additional selling on Wall Street.
Scenario #2: Due to economic concerns the new President/Congress could wait to raise taxes and simply let the Bush tax cuts expire at the end of 2010. Taxes would then increase in 2011, following the current tax law.
Economic Downturn Issues: With the unprecedented economic events, please consider the following tax planning issues before year end.
Stock and Investment Losses: Consider selling investments at a loss to offset capital gains. You can deduct up to $3,000 of capital losses against ordinary income. If you sell your investments at a loss, you must wait 30 days before purchasing the same investments; otherwise the IRS will disallow the loss. You can also sell the investments at a loss and immediately repurchase a similar investment that you expect to perform similarly.
ROTH Considerations: Depressed market conditions present the opportunity to convert a normal IRA to ROTH with a less substantial tax burden. If you made a ROTH conversion earlier this year when the markets were higher, consider a recharacterization to disallow the previous ROTH conversion giving you the opportunity for a future ROTH conversion at the lower market values.
Retirement Savings: If you are experiencing a financial crunch, be warned that you could face a 10% tax penalty on early withdraws from IRAs and retirement plans in addition to the normal tax rate if you do not meet the narrow list of exemptions.
Mortgage Issues: If you were involved in a mortgage foreclosure and your debt was forgiven, Congress passed legislation to exclude the forgiveness of debt from taxable income on primary residences. Please call us to see if you qualify.
Employment: If you are uncertain about the future of your employment, you may want to liquidate some assets to have more cash on hand. Another way to save is to discontinue automatic contributions to retirement, investment and college savings accounts.
Windows of Opportunity: Please review the following information to see how 2008 compares to 2009 and future years. Be aware this table is a reflection of the current law. Any new legislation could alter any or all of these tax rates or incentives.
Note: This table tracks the current and future rules for many different tax issues that will directly affect you. With careful planning you can avoid future tax traps. Many of the current tax rates are scheduled to increase in the future and many tax incentives are offered for a limited amount of time. Do not miss these windows of opportunity.
|
|
2008 |
2009 and
Future Years |
Tax Planning |
|
Dividend Tax Rate |
15% (qualified
dividends) |
15% (qualified
dividends for 2009 and 2010), taxed at ordinary income rates in years
following |
Taxes will not be
lower than in the current year for dividends.
Consider dividend payouts before taxes increase in 2011 or sooner. |
|
Long-term Capital
Gains Tax Rate |
15% |
15% for 2009 and
2010 and 20% in years following |
Potential for
increased taxes in future years.
Consider realizing gains before tax rates increase. |
|
Direct IRA
Contribution to Charity |
Available for 2008 |
Available for 2009
but not future years. |
Taxpayers can
shift income directly to their favorite charity and avoid being taxed on
those funds. |
|
First Time
Homebuyer Credit |
4/9/08 – 12/31/08 |
01/01/09 – 6/30/09 |
If a taxpayer
purchases his first home during this window he may be eligible for a $7,500
interest free loan. |
|
Section 179 Limit |
$250,000 (fiscal
years beginning in 2008) |
$128,000 |
Business purchases
can be written 100% off against taxable income as opposed to being
depreciated. |
|
50% Bonus
Depreciation |
Available during
2008 calendar year only |
Not Available |
Opportunity to
expense half the cost of 20 year or less property as opposed to being
depreciated. |
|
Expanded IRA
rollover to ROTH opportunity |
Not available |
Available in 2010
only |
Taxpayers normally
not qualified to contribute to a ROTH can bulk up their traditional IRAs
today to prepare for the 2010 conversion. |
Double Blessing: Prevent income from being taxed and give to your favorite charity.
There are two options for a taxpayer to prevent income from being taxed by giving directly to a charity.
1. If you are 70 ½ years old, have your IRA make a direct donation to a charity during 2008 or 2009. Normally any funds withdrawn from an IRA are taxable, but if you direct your IRA to donate to a charity these funds are not taxed.
2. Active farmers can reduce their taxable farm income by donating commodities directly to charity. Farmers avoid taxation on the sale of grain, both with income tax and self-employment tax for those who file a Schedule F.
Note: Both options require certain mechanical procedures to be followed in order to qualify. Please contact us for assistance. Also, since income is not being taxed no charitable deduction can be claimed on the excluded income.
Charity Documentation: For donations of $250 or less, you must have a receipt from the charity or a canceled check. For donations greater than $250 you must have a receipt from the charity. Receipts from charities must follow IRS guidelines.
Please contact us and we will be happy to meet with you.