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Post-Election Twist Put On Tax Planning

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The Associated Press

Published: November 30, 2008

NEW YORK - Heading into the holidays it's likely that you're going to be thinking a lot about money. This time of year tax advisers like to remind us that there are ways to minimize our tax bill next April. With an economic downturn in full swing and a new president waiting in the wings, that typical advice is coming up against a range of uncertainties this year.

"Traditional year-end tax planning says accelerate your deductions and defer your income," said Brittney B. Saks, a partner with PricewaterhouseCoopers private company services practice. "But interestingly, with a new president, a new administration and a new Congress, we are pretty certain there's going to be some tax law changes."

Since President-elect Barack Obama has pledged to raise taxes for families making more than $250,000 and increase capital gains taxes, for instance, she said some of the usual year-end planning advice might soon be reversed. This year, "there's a lot more thought that goes into year-end planning," she said.

Jackie Perlman, senior researcher for H&R Block Tax Institute, warned that planning shouldn't get ahead of the law. "It is important to understand that what is said during the campaign may or may not be what actually happens," she said.

"It's difficult to predict what's going to happen," agreed Randy Frischer, a tax partner with BDO Sideman. Making the issue even more complicated is the question of exactly when changes might take effect. "By the time new legislation gets put in place, it may very well be in 2010."

As 2008 draws to a close, here are some steps you can take to minimize your taxes.

Get Organized: The first step in the planning process is to make sure that your records are organized and up to date, said Roni Deutch, a California-based tax adviser. "Without records and without substantiating your deductions, you have no deductions," she warned.

Defer Income: Bonuses are scarce for most people this year, but if your company is still giving them, ask to receive it in January. For the self-employed, sending invoices out late in December could make it more likely you'll receive payment in the new year.

Check On Capital Gains: It's important to check to find out whether you might have capital gains to report. A lot of mutual funds have been forced to sell assets as investors bailed out. So despite the fact that the fund likely posted losses, investors may be receiving a capital gains distribution.

"There's a tendency for the mutual funds to show very large gains, which is counterintuitive," said Tom Ochsenschlager, vice president of tax at the American Institute of Certified Public Accountants. You should call or check your fund company's Web site for guidance.

Consider Taking Tax Losses: Investors might want to consider selling some holdings that have lost value to offset any capital gains. Current law allows investors to claim up to $3,000 more in losses than in capital gains.

Determine Whether You're Subject To AMT: The Alternative Minimum Tax, which was designed to make sure that high income earners with multiple deductions pay at least some tax, now captures many upper middle class workers because it is not indexed to inflation.

Because many deductions are not allowed for those who must pay AMT, Ochsenschlager said you should determine whether you're subject to it before taking steps to maximize deductions you then would be unable to claim.

Congress included a measure to adjust the AMT so that most people are exempt in the bailout bill, but figuring out whether you may need to pay can still be a complicated task that may require help from a tax adviser.

Boost Your Charitable Deductions: Any check written or item donated before Dec. 31 can be deducted. "In this environment, people should think about cleaning out their closets and giving away clothing and furniture to charity," said John Hewitt, founder of Liberty Tax Service. If you don't have much credit card debt, you can charge a donation before the end of the year and pay it off in 2009.

Make A Charitable IRA Transfer: Perlman of H&R Block said individuals who are at least 701/2 years old can also make a tax-free transfer from their IRA of up to $100,000 to a charity, as long as the transfer is direct to the organization.

This can be useful for retirees who must take required minimum distributions from an IRA, but since the money goes untaxed, donors do not get to deduct the contribution.

Prepay Bills: Prepaying things like January's mortgage bill, a child's spring semester tuition, local property taxes or state income taxes and even tax-advisory and preparation fees can help drive up the amount of deductions you can itemize, Hewitt said.

Assess Medical Expenses: Ochsenschlager also suggested checking medical bills to see if the total spent is close to 7.5 percent of adjusted gross income. If your expenses are at or near that threshold, it might make sense to have other elective work done or prepay some expenses to take advantage of that deduction.

Think Green: Finally, there are tax credits available for several energy saving investments, including installing alternative energy devices such as solar panels, fuel cells or wind turbines to provide electricity for a home, and for buying alternative fuel vehicles.

There are tax credits available for the purchase of a hybrid or electric car. A list of the credits available for different models is available on the Internal Revenue Service Web site, www.irs.gov.

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