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Michael Green: Year-end planning strategies

Posted: December 26, 2008 8:30 p.m.
Updated: December 27, 2008 4:55 a.m.
 
As we approach year-end, there's still time to take action to lower your 2008 tax bill and add to your tax-advantaged retirement accounts. Listed below are a few ideas to get you started. This is by no means an exhaustive list.

Make the standard deductions work for you. If your itemized deductions are just at or below the standard deductions (currently $10,900 for joint filers and $5,450 for singles), they don't generate any tax benefit for you.

However, you can bunch itemized deductions from two calendar years into a single tax year to take full advantage of them and exceed the standard deduction that year. Then you can take the standard deduction the next year.

Following this two-year pattern results in greater deductions overall. Deductions that work well for this strategy include charitable contributions, property taxes, the fourth-quarter estimated state income tax payment and your January mortgage payment.

* Consider selling appreciated securities. It may be a good time to consider selling capital assets (e.g., common stock) with a low-cost basis. The maximum capital gains tax rate is 15 percent for gains from the sale of qualifying assets held more than one year. In fact, taxpayers in the 10 percent and 15 percent ordinary tax brackets can take advantage of a 0 percent capital gains rate for the first time in 2008. The 15 percent maximum tax rate is available for both the regular and alternative minimum tax (AMT). In addition, qualifying dividends received during 2008 will generally be taxed at the 0 percent or 15 percent capital gain rates.

* Contribute to your IRA. You can contribute up to $5,000 ($6,000 if you are age 50 or older by year-end) to your IRA in 2008 if certain conditions are met. For married couples, the combined contribution limits are $10,000 ($5,000 each) and $12,000 ($6,000 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income. In addition, contributions to traditional IRAs may be tax-deductible subject to specific conditions and limitations.

* Contribute to your employer-sponsored retirement plan. The 2008 annual deferral limit for qualified retirement plans is $15,500. If you are at least age 50 by year-end, you can contribute an additional $5,000 to 401(k), 403(b) and 457 plans. These contributions normally decrease your taxable income and the income taxes thereon.

* Fifty-percent bonus depreciation. Thanks to recent legislation, qualifying equipment, which includes most tangible personal property and software and certain leasehold improvements acquired and placed in use during 2008, is eligible for an immediate 50-percent bonus depreciation deduction. This is in addition to the normal depreciation deduction on the remaining balance.

* Section 179 expensing option. For eligible business properties, the Section 179 (election to expense otherwise depreciable assets) limit was recently increased to $250,000 for tax years beginning in 2008 only. However, the Section 179 deduction phases out dollar-for-dollar after eligible equipment purchases reach $800,000 for the same period. So the $250,000 deduction is completely phased-out when eligible equipment purchases total $1.050 million.

* Take advantage of the $8,000 additional qualified-vehicle deduction. Qualified vehicles acquired and placed in service during the 2008 calendar year only are eligible for an increased depreciation deduction of up to $8,000. This deduction is in addition to the normal maximum of $2,960 for qualified automobiles and $3,160 for qualified trucks or vans.

Michael Green of Michael L. Green Tax and Financial is an Enrolled Agent and a Certified Financial Planner in the Valencia Industrial Center. His column reflects his own views and not necessarily those of The Signal.

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