Tax Lawyer's Blog

There are just two months left in 2008. Here are some things you might want to consider doing to lessen your 2008 tax burden. You should consult with your tax preparer/advisor before implementing any of these strategies.

1.  Expense Acceleration

One of the oldest and truest forms of tax planning has been the prepayment (accelerated payment) of tax deductible expenditures.  Here’s how it works:

Most individual taxpayers are on what is known as  the “cash basis” method of accounting. Cash basis simply means you include income on your tax return in the year you received it (or first had the “claim of right” to receive it) and you take deductions in the year you make the expenditure.

Any tax deductible expenditure you make before December 31, 2008, is to be included as a deduction on your 2008 Form 1040.  Some items that you might want to prepay to accelerate a tax deduction are:

• Mortgage payments – The interest portion is deductible on Schedule “A” of your 1040.
• Medical expenses – Because medical expenses can be deducted from taxable income only to the extent they exceed 7.5% of your adjusted gross income, spreading the expenditure out over a two year period could cause you to lose the deduction. Consequently, if you have significant medical expenses in 2008 and have outstanding bills for those expenses, you might want to pay before year end in order to maximize your medical expense deduction this year. 
• Charitable contributions – see 1, above.
• Self-Employed business expenses – If you are self-employed, any business expenses you pay this year can be used to offset your business income.

Caveat: If you expect your marginal tax rate to go up next year, this might not be a good move because you will be pulling tax deductions into a year in which you have a lower tax rate. Consult your tax advisor.

2.  Income Deferral

The flip-side of expense acceleration. Again, cash basis taxpayers are only required to include in income monies and property they actually received in 2008. If your employer (or a customer of your business) owes you money this year, but doesn’t pay you until 2009, you do not have to include that income on your 2008 tax return. 

Caveat: If you expect your marginal tax rate to go up next year, either as a result of an Obama victory or because you will make more money, this might not be a good move because you will be pushing income into a year in which you have a higher tax rate. Consult your tax advisor.

3.  Sell Loss Assets

Many people are taking it on the chin in our current bear market. If you are one of them, you might want to consider selling some of your stock investments and claiming the losses on your 2008 tax return. 

An unlimited amount of capital losses can be used to offset capital gains, but to the extent capital losses exceed capital gains your deduction is limited to $3,000.00. The remainder of the excess capital losses is carried over to future years.

Caveat: We are not investment advisers. Consult your financial advisor before you do this to make sure it makes overall financial sense.

4.  Sell Gain Assets

We are two days away from the election of the 44th President of the United States. All the polls seem to indicate that it’s Obama’s election to lose. 

If Obama wins, you might want to consider selling assets from which you expect to have a gain.**  Obama has proposed an increase in the capital gains rate from the current 15% to 20%. 

Example: If you have an asset the sale of which you expect will generate a capital gain of $100k, you will save $5k by selling it before the capital gains rates are increased. 

5. Year End “Tax” Cleaning

This one promises to be more profitable than the obligatory cleaning everyone does in the Spring.

Any clothing or other tangible goods you don’t want you can donate to the Salvation Army or Goodwill. I recommend that you take photographs of everything you donate to establish what you are giving and it’s condition. And don’t forget to get a receipt.

**“Gain” is computed according to the following formula: (Sale Proceeds) - (Amount you paid for the investment + amounts spent to improve the investment + the costs of selling the investment) = Capital Gain)

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