Year-End Tax Strategies for 2008

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Concern about running out of money has gone from a dull nagging worry to an immediate fear. For many clients it is worthwhile to reevaluate your finances and in some cases make significant decisions regarding how much you can safely spend, or if you are still working, how long you should continue to work. We find it most useful to concentrate on things that we can do something about. This article addresses year end tax strategies that should be considered and in many cases implemented.

Increasing Tax Rates for Higher Income Taxpayers
President-elect Obama has indicated in his tax plan that the 2008 highest ordinary tax brackets of 33% and 35% are to increase in future years to 36% and 39%, respectively. Also, the capital gains and qualifying dividend tax rates are to increase from 15% to 20%. He has targeted married taxpayers with incomes of $250,000 and single taxpayers with incomes over $200,000. If you are one of these taxpayers and these changes occur for year 2009, traditional tax planning might normally result in the conclusion that accelerating income into 2008 or postponing deductions into 2009 would give the biggest bang for your buck. For example, let's say you have the flexibility of accelerating $10,000 of income before the end of 2008 instead of delaying receipt until January 2009 and you are in the 33% tax bracket this year. You would potentially save $300 in income taxes by doing so. I use the word potentially due to AMT (Alternative Minimum Tax). Taxpayers with large enough incomes would not be adversely affected by the acceleration of additional income.

Items of consideration as proposed tax rates increase:

  • Elect to accelerate U.S. savings bond income.
  • Accelerate the sales of businesses or other sales to lock in lower rates.
  • Disposing of underwater real estate ventures to absorb the excess of liabilities over basis at favorable rates.
  • Pay dividends from C and S corporations to take advantage of lower rates.
  • Consider electing out of current installment sales treatment or get out of old installment sales in order to recognize the income this year.
  • Tax-exempt investments will be more attractive due to higher after-tax yields.
  • Delaying the payment of deductible expense until 2009. 

Now, the word we're hearing is that President-elect Obama is considering delaying the increased rate hikes until beyond 2009 in order to give the economy time to get back on track. This uncertainty really muddles the tax planning concept of projecting tax liabilities over a two-year period.

Roth IRA Conversions Are Especially Relevant Due to Stock Market Declines

More Upside Potential for New Conversions
The tax-free growth of Roth IRAs has made Roth conversions a valuable tool for many of our clients and allows significant long-term tax savings. While each case will benefit from an individualized analysis on the merits of the conversion, the critical feature of the Roth is that once the initial taxes are paid on the conversion, income taxes will never be due on the growth, capital gains, dividends, interest, etc.

Our number running calculations reveal the long-term advantage of conversions is greater with a higher rate of investment rate of return, even if it is only a high rate of return in the first year. If your current year conversion has dropped in value you may "undo" the conversion (see the recharacterization discussion below). If instead the market makes a large gain in the coming year, you can decide to keep the converted Roth IRA. This is one of very few situations a taxpayer can use 20/20 hindsight to determine what is best for them.

In light of the recent fast and steep stock market declines, the potential gains from this point forward are even greater than where investment values were only a few months ago. If you have not made a Roth conversion yet, and assuming you qualify, we strongly recommend you consider one now in light of the new investment situation and your current circumstances. Remember, converting when the market is at its lowest point will provide the most in long-term advantages.

Don't Pass Up Opportunities Created By Low Income Levels
Many factors must be considered in deciding whether a Roth conversion is right in your circumstances. A very important one is your current and future tax rates. Your current tax rate - or what tax bracket you are in - will help to determine how much income tax you pay on the conversion. The lower the tax on the conversion, the better a conversion becomes. If you are able to convert and would not owe any tax on the conversion, it is an "opportunistic" conversion that should not be passed.

If you own an IRA and your current year tax deductions and/or business losses will exceed your taxable income items, please consider doing a Roth conversion. With proper planning, you can convert that taxable IRA into a tax-free Roth IRA without paying any income taxes. Even converting enough of the IRA and paying a little tax at the lowest marginal tax rates may certainly prove to be a very wise tax decision over the long haul.

Transferring Assets to Roth IRAs Is Easier in 2008
In 2008, taxpayers who are doing Roth conversions will now be able to roll over qualified plan assets directly to a Roth IRA account. Previously, those same qualified plan assets needed to be rolled over into a traditional IRA and then converted to the Roth IRA.

Recharacterizations Must Be Considered for 2008 Roth Conversions
If you made a Roth IRA conversion previously in 2008, there is a high probability that the recent fast and steep stock market declines have left your Roth IRA at a value much less that the amount converted. Without doing a recharacterization, you will find that in completing your 2008 tax return, you are paying tax on the larger amount converted. If you had done a smaller conversion now instead, you would be in the same position with your Roth IRA but owe much less tax to the IRS.

Fortunately, recharacterizations are available to undo the conversion and put the money back into a traditional IRA. Even if that value of the money converted is now less, you will eliminate all taxes associated with that conversion. These recharacterizations can be done up to April 15 of the year after the conversion or with a timely filed tax return extension or a special election, up to October 15 after the year of conversion.

For temporary or small declines in value it may not be prudent to do a recharacterization. However, because the 2008 market declines have been so large, we highly recommend consulting with your tax advisor to see if a recharacterization now makes sense.

There are restrictions on subsequently converting the lower value IRA amount again after you have recharacterized the initial conversion. However, if you have other IRA money that was not originally converted, you may be able to do a second conversion to put you back in the same place with the Roth IRA had the market not dropped in value. Again, we suggest consulting with your tax advisor to see if a reconversion now makes sense.

Prepare Now for 2009 or 2010 Roth Conversions If You are Not Currently Eligible
A significant problem is that to qualify for a conversion, your modified adjusted gross income (MAGI) must be under $100,000; so many higher income taxpayers are prohibited from making them. Minimum required distribution income from an IRA is not considered when determining your (MAGI), while pension plan minimum required distributions are included in your (MAGI). This presents a two-year planning opportunity for these retirees to consider in order to qualify for a 2009 conversion. If you receive income from a retirement plan that causes your MAGI to be over $100,000, plan to roll-over your retirement plan into an IRA account before December 31, 2008 so that next year, the minimum required distribution does not count in determining your (MAGI).

The current law will permit all taxpayers to make Roth conversions beginning in year 2010, regardless of their income level. For the family, the long-term benefit of a Roth IRA conversion is simply phenomenal. This will be of particular benefit to high-income taxpayers who have not had the opportunity to grow significant amount of funds tax-free in a Roth account. The high-income taxpayers are most likely to have the longest time horizon to grow the funds tax-free and may not have to pay a higher marginal tax rate on the conversion income.

If you currently cannot make the maximum Roth IRA contributions because your income is over $166,000 for joint filers or $105,000 for a single filer, consider making nondeductible traditional IRA contributions and converting them to Roth IRAs in 2010. If those are your only IRAs, you may pay much less in tax on the conversion since you will have basis equal to the amounts contributed.

Caution for Certain Roth Rollovers
If you are currently making contributions to a qualified employer plan that has a Roth feature such as a Roth 401(k), Roth 403(b), etc., take note. For tax years 2008 and 2009, you will not be eligible to roll over the Roth 401(k), Roth 403(b), etc. directly into a Roth IRA if your modified adjusted gross income is $100,000 or greater. Those individuals in this situation will have to wait until 2010 to qualify for the rollover when the $100,000 modified AGI restrictions no longer apply. This code amendment enacted in the Pension Protection Act of 2006, certainly not being the intent of Congress, does restrict having complete portability of your Roth account for a couple of years. The danger is the tax ramifications of doing a non-qualifying rollover.

Tax Loss Harvesting

Capital gains tax rate increases on the wealthy is another change in the new President's tax agenda. President-elect Obama has proposed tax rate increases on long-term capital gains from the current top rate of 15% to 20%. The middle and lower income class taxpayer rates would remain the same. The proposed increase was to take effect in 2009 might also be pushed back another year.

Using losses to reduce taxable gains by offsetting the losses against the gains is referred to as "tax-loss harvesting" or "tax-loss selling." Now is the time to review your investment portfolio and make some decisions that will generate tax savings. I think it is relatively safe to assume that most taxpayers that have after-tax investments in the equity markets have probably suffered losses on those investments. If you haven't already considered or actually sold some of those investments there is still time before the end of 2008. If you are in the either the 10% or 15% tax brackets in 2008, all of your long-term capital gains will be tax-free. If you are in the 25% or higher tax bracket read carefully. If you own mutual funds don't just assume there will be no reportable capital gain distributions for 2008 just because the fund value is down considerably. A prudent taxpayer should calculate, if applicable, the amount long-term capital gain distributions that their mutual fund(s) will be reporting as taxable in 2008. Selling some of your investments and recognizing the taxable losses should eliminate that gain. In fact, selling enough shares to not only eliminate the gains but to have excess losses of $3,000 that can be used to offset ordinary income at your highest marginal rate. Be careful to avoid a wash sale, i.e., buying the same security within 30 days of the time you sell the shares-the tax rules will disallow the loss.

Also, keep in mind that reducing your adjusted gross income may enable you to qualify for other tax-related benefits that are tied directly to reducing your adjusted gross income. A few of these are reduced taxable social security benefits, qualifying for a Roth conversion or just freeing up more to convert to a Roth IRA at desired tax bracket. Qualifying education related credits or deduction, lower AMT tax, and smaller phase outs of your itemized deductions and personal exemptions can also benefit taxpayers by having a lower adjusted gross income.

Most selling this year will be for loss recognition purposes. However, if you are in the 10%-15% tax bracket this year and expect to be in a higher tax bracket in 2009, you may want to recognize a tax-efficient amount of long-term built-in gains on low basis investments in 2008. You can lock in the 0% tax rate by selling the shares and re-establish a new higher tax basis by immediately buying those same shares. You need to "run the numbers" to make sure that the additional capital gain income (although hypothetically at a 0% tax rate) doesn't end being taxed at a much higher marginal rate than expected. There is only a limited amount of long-term gains that can be tax-free based on each taxpayer's situation.

Many investors fail to maximize the tax benefits by specific lot selling. Keeping track of your stock purchases at lot levels (instead of the First-In, First-Out default method) allows for greater control when instructing your broker to sell shares.

Donating Stock to Charity

While the topic is still fresh, if you typically donate shares of stock to your favorite charities at year-end, and those shares are now worth less than the amount you paid to acquire them, you would be better served to sell those shares, recognize the tax loss and then donate the stock proceeds to the charity. If you donate the depreciated stock (because you have done it so frequently in earlier years when there were built-in gains) you forego the ability to recognize the loss on the stock while the value of your donation is exactly the same. If you have significant amount of appreciated securities, donating them to charity is still a good strategy.

2008 Extender Provisions

There were a few tax provisions set to expire at the end of 2007 that have been extended through 2008 and some beyond 2008. If any of these should apply and you have not considered them, please do. Set to expire are the following:

IRA Distribution to Charity. Up to $100,000 of current year minimum required distributions can be directed to your favorite charities and be excluded from current year income. This strategy usually provides the greatest benefit to taxpayers who don't normally itemize their deductions and/or live in states that don't take itemized deductions into consideration to arrive at state taxable income. "Expanded Details Follow"

Residential Energy Credit. If you are planning to make some qualifying energy efficiency improvements to your principal residence, hold off until 2009. This provision was extended but not for 2008 qualified installations.

Personal Nonrefundable Credits. Nonrefundable personal credits allowed to offset the entire regular tax and AMT have been extended through 2008. Absent Congressional action in 2009, most nonrefundable credits can't exceed the excess of regular tax liability over tentative minimum tax.

Tuition and Fees Deduction. I am aware that most parents spend well in excess of the $4,000 maximum deduction for qualifying tuition cost in a given year, and there is no need to spend additional amounts prior to the end of the year. If you are not a full-time student or are just enrolled for a few classes, review your situation to make sure you max out before the end of 2008.

Other extended provisions:

  • Educator Deduction
  • State and Local Sales Tax Deduction
  • Research Credit
  • Qualified Leasehold Improvements Depreciation 
  • Private Mortgage Insurance Deduction

Alternative Minimum Tax

Congress has passed the 2008 AMT "patch" with inflation adjusted amount increase for the AMT exemption. Although any amount helps, most of you that paid AMT in 2007 will most likely pay it again in 2008.

Because of the complexities of the AMT tax calculation, traditional tax planning to minimize taxes can backfire when you are subject to AMT. For example, if you are subject to AMT at all, paying additional state and local income taxes or unreimbursed employee business expenses prior to year-end will waste these itemized deductions.

In light of the fact that tax-exempt investments may become more attractive due to higher anticipated tax rates, beware of the AMT trap on certain bonds. Certain bonds are exempt under the regular income tax but not under the AMT. These bonds generally fall under a category called private activity bonds. State or local governments issue them, but instead of funding something purely public, like roads and public schools, they provide funding for private enterprises. If you don't pay AMT, these bonds can be a good deal. They pay a slightly higher rate of interest to make up for their treatment under the AMT. That treatment doesn't matter if you don't pay AMT, so it's nice to have the higher yield. The increase in yield is pretty tiny, though. It's nowhere near big enough to make up for the added tax cost if you end up paying AMT on the interest. Anyone who pays AMT should stay away from private activity bonds. When investing in an exempt bond, check the prospectus to make sure it qualifies for exemption under the AMT as well as the regular income tax.

Home Buyer's Tax Credit (It's Actually a Loan)

The Housing and Economic Recovery Act of 2008 introduced a new credit of 10% of the purchase price (not to exceed $7,500, reduced to $3,750 for married filing separately) for a principal residence by a first time homebuyer (who has not owned a residence for the three years preceding the purchase). The credit is only available to taxpayers who qualify within the income limits set forth. The credit is refundable even if the taxpayer has little or no tax liability. Calling this a "tax credit" is slightly misleading. Most "tax credits" are not repaid. This particular credit is recaptured for each of the 15 years the taxpayers own the property with any unrecaptured amount accelerated to the year of disposition. This has the effect of "interest-free" loan from the government that is repaid through the tax system (the amount of the credit will be repaid on your tax returns for each succeeding year). This applies only to purchases made on or after April 9, 2008 and before July 1, 2009. A taxpayer can elect to claim the credit for a home purchased in 2009 (before 7/1/09) on his 2008 return.

The Stimulus Rebate

If you got the full amount of advance rebate check this past year you are in the clear. Remember, the advance credit was based on your 2007 tax data. For those who received reduced or no rebate due to income limits or is no longer a dependent of someone else in 2008 you may still claim the credit on your 2008 tax return. This is an area where reducing your 2008 taxable income by deferring income or accelerating deductions can provide a way to still capture the credit this year.

Long-Term AMT Tax Credits

The Emergency Economic Stabilization Act of 2008 (EESA) significantly altered the minimum tax refundable credit. Such long-term credits were recoverable to the extent of the greater of $5,000, the prior year's AMT refundable credit, or 20% of the unused long-term minimum tax credit. The credit calculation was subject to a phase-out when AGI exceeded certain limits. Under EESA the phase-out is eliminated and the percentage level is increased to 50%. It appears the intent is to allow taxpayers to use their credit over a two year period while not nixing high income taxpayers.

Extended Section 179 Expense Rules Offer Flexibility

As part of the Economic Stimulus package the maximum dollar amount eligible for Section 179 expense is $250,000 in 2008 if certain other provisions are met. These rules allow taxpayers to reduce income taxes by fully expensing purchases of qualifying assets used in business (such as computers and other equipment) in the year of purchase. Multi-year plans can be made with knowledge that acquisitions 2-3 years from now can still use the higher deduction limits.

By reviewing your current year marginal rates and projecting next year rates, you can make sound decisions on whether to make a purchase before the end of this year or delay it into the next year.

Take Advantage of Direct Charitable Contributions from IRAs if You Are Age 70½

If you are over age 70½, you can make a qualified charitable distribution directly from your IRA to the charity of your choice (subject to some restrictions). This provision applies to IRAs only and not qualified plans. The money transferred from the IRA does not count as income. You don't get a charitable deduction, but for many taxpayers, this is a good trade. A key provision of this new law is that the IRA amount donated in this fashion counts toward your required minimum distribution (RMD). Also, if you have basis in your IRA, the donated part comes only out of the taxable part and does not diminish your basis. This may set you up for a more favorable Roth IRA conversion in future years since less of the conversion would be taxable.

Although on the surface, it appears that reducing your income and your charitable deduction by the same amount should have no effect on you, and in some cases it may not, it can save you money in many ways, as follows:

For people who use the standard deduction and make charitable contributions, this new rule is a windfall. Instead of contributing your after-tax funds, you can use pre-tax IRA funds and have no taxable income from the IRA.

For people who take only their minimum distribution, they can reduce their adjusted gross income by the amount of the direct IRA donation because the direct IRA donation counts toward the RMD and you only include as income the additional withdrawal needed to cover the RMD. There are several other potential tax advantages of lowering your adjusted gross income, even if you itemize deductions, such as lowering phase-outs of deductions and income limitations.

For the large number of people in a somewhat lower income situation, less than the full 85% of your social security income is taxable. By lowering your income, less of your social security income is taxable.

For individuals donating large amounts to charity, you may find another potential tax advantage of donating your IRA directly to charity. You can only deduct up to 50% of your AGI amount to charity, and if the contribution is large enough, using this method will circumvent this limitation altogether.

Another potential advantage for lowering your AGI for some individuals is that you may then qualify for Roth IRA contributions. If you have taken your RMD for the year, using the IRA to prevent a further increase in you AGI may also allow you to qualify for a Roth IRA conversion.

Please note that lowering your income using this method will not work if you have already withdrawn your RMD. If that is the case, and you itemize deductions, you may be better off donating after-tax funds like cash or appreciated securities.

Plans to Convert your Vacation Home into a Primary Residence

If you convert your vacation home or rental property to your primary residence before the end of 2008, you may completely avoid the tax hit. The provision will affect taxpayers who own vacation homes or rental properties but convert then to a principal residence for a period of at least two years prior to sale. In the past, as long as the taxpayer met the two out of five year period of qualifying use the gain on the sale of the residence was eligible for exclusion up to the allowable limit. The new law denies the code section 121 exclusion to as much of the gain from the sale of the principal residence (after December 31, 2008) as is allocated to periods of "nonqualified use". Any depreciation claimed after May 6, 1997, is not eligible for excluded amount of the gain.

Retirement Plan Contributions through Your Plan at Work

In 2009, individuals can contribute $16,500 per year ($22,000 per year if age 50 and older) to their retirement plans. If you have not, now is the time to make changes to your contribution levels for next year. These elective deferrals can be made on a pre-tax basis or, if your employer offers them, through the new Roth 401(k) and 403(b) plans (see below).

Contributions to elective deferral retirement plans and self-employed retirement plans will reduce your adjusted gross income. See the partial list of tax deductions and tax credits above that are directly affected by adjusted gross income.

Roth 401(k) and 403(b) Plans

This really is a great new addition to the retirement plan arena. By now, most taxpayers have heard of the Roth IRA and we are advocates of using them, when possible, to take advantage of the tax-free growth of the account. The one drawback of Roth IRAs for many of our clients is that they make too much money to qualify for Roth IRA contributions. Well, that statement is old news since all taxpayers whose employers offer Roth 401(k) or Roth 403(b) plans are now eligible to make Roth 401(k) or 403(b) contributions to these plans regardless of their income.

The differences between a Roth 401(k) and a traditional 401(k) are that with the Roth 401(k), you use after-tax dollars to fund your elective contributions and that the Roth 401(k) grows income tax free. For example, if your salary is $120,000, and you contribute $16,500 to your existing 401(k) or 403(b), you must pay taxes on $103,500 of wages. Keep in mind though, that when you eventually withdraw those retirement funds, you will be taxed on the $16,500 in the retirement plan plus all the accumulated investment earnings. What happens if you contribute the same $10,000 to the Roth 401(k) or Roth 403(b)? Your taxable wages will be $120,000 for 2009, thus increasing your current year tax liability. The advantage, however, is that the Roth 401(k) and 403(b) will grow income tax free for your life, your spouse's life, and the lives of your beneficiaries.

That is an advantage that may be difficult to evaluate in relation to the tax-deductible traditional 401(k)/403(b) contribution. Does the fact that the same $16,500 plus all accumulated earnings will be tax-free when withdrawn help ease your pain? Consideration of many factors should be made to address the issue including current and estimated future financial and tax situations of you and your family members.

Most people are likely to have accumulated the bulk of their retirement plan nest egg in fully taxable retirement plans such as 401(k)s and 403(b)s. Thus, most of their withdrawals at retirement will be fully taxable. Having some of your retirement money in a Roth account provides a way of diversifying your tax exposure by giving you some flexibility in which account to withdraw from that is most tax efficient.

Younger people who are currently in lower tax brackets should always consider funding a Roth account. Running the numbers will prove this to be a long-term winning decision.

Other Ideas to Reduce Taxable Income and Reduce Taxes

Bonus Depreciation

The Economic Stimulus Act of 2008 reinstituted the concept of 50 percent bonus first-year depreciation with respect to qualified property. For purposes of the additional first-year 50 percent deduction, depreciable property will meet this requirement if the property is acquired after January 1, 2008 and before January 1, 2009. Determine if the additional first-year bonus depreciation deduction works best for your situation. Most businesses with significant profits will get the full benefit of the additional depreciation. You should determine if future anticipated profits or higher tax rates would make deferral of the deduction more valuable in the future.

In the case of certain passenger automobiles used for business purposes, the first year depreciation deduction is increased by an additional $8,000. The purchase of a used car does not qualify for first-year additional depreciation. Certain SUV's are not listed property and have much higher first year limits.

Commuting Expense Provision

A new provision now allows a bicycle commuter's exemption. Employee's can now receive a tax-free benefit of $20 per month ($240/year) for their eco-friendly commute to work.

Gifting Depressed Stock

The current market slump can be good news for estate planning. By giving your children or grandchildren shares of stock with depressed prices you can reduce your taxable estate by removing more shares at a reduced value that will eventually rebound. If you give a donee shares worth $12,000 ($13,000 in 2009) or less, the entire gift is out of your estate. The exclusion is doubled to $24,000 per donee if your spouse joins in on the gift.

Focus on Reducing your Adjusted Gross Income

Many taxpayers have some ability to reduce or increase their adjusted gross income. Projecting your current year adjusted gross income and taking steps before year-end to lower this amount can result in reducing your overall tax liability by thousands of dollars. Reducing your adjusted gross income helps preserve certain tax breaks you may otherwise lose or avoids additional taxable income you would not otherwise have such as:

  • Deductions for higher education expenses and student loan interest.
  • Child tax credits for qualifying children.
  • Hope and Lifetime learning education credits.
  • Personal exemption amounts for you and your family.
  • Avoiding phase-out of itemized deductions.
  • Losses from certain rental real estate activities.
  • The ability to make a deductible IRA or Roth IRA contribution or a Roth conversion.
  • Various other tax credits.
  • Reduced overall taxability of social security benefits.

Pennsylvania Tax Planning Ideas

Qualified Tuition Programs - Contributions to qualified tuition programs (as defined in Section 529) are deductible from taxable income. A separate deduction up to $12,000 in 2008 for each beneficiary (the annual gift tax exclusion limit) is available to all such plans, including plans offered by other states. As the funds grow and when the funds are used for qualified higher education expenses, they are not taxable. If subsequent distributions are not used for qualified higher education expenses, they will be taxed.

Health Savings Accounts and Archer Medical Savings Accounts - HSA and MSA accounts will be taxed for Pennsylvania purposes following federal rules. Allowable contributions will be deductible from income and any distributions not used for qualified medical expenses will be taxable as interest income.

Other Tax Reduction Ideas - Oldies, But Goodies

Make or Increase IRA and Self-Employed Retirement Plan Contributions: Business owners can reduce AGI by increasing contributions to pre-existing retirement plans or establishing a new plan such as 401(k) plans, including one-person 401(k) plans, SIMPLE pension plans, SEPs, Keogh plans, or regular (deductible) IRAs. Most self-employed retirement plans allow for deductions in tax year 2008 even for contributions which are made after year-end but before the extended due date for filing the return. In other words, payment of 2008 deductible retirement plan contributions can be postponed until October 15, 2009, with an automatic extension. There is no extension of time for making IRA contributions. The deadline is April 15, 2009.

Maximize Loss Situations: If you are experiencing an unusual tax year where you may be in a much lower tax bracket than usual or even in jeopardy if wasting itemized deductions and personal exemptions, careful tax planning can be more crucial than ever. Make sure you project your taxable income before the end of the year and examine all your alternatives. There may be steps to take to avoid wasting deductions such that taxes can be lowered in future years.

Enroll in a Cafeteria or Flexible Spending Plan: Take advantage of employer provided Cafeteria or Flexible Spending Plans. This strategy allows you to pay for medical, child-care and other qualified expenses with pre-tax dollars. Medical expenses are rarely fully deductible on Schedule A due to the 7.5% of AGI limitation. Medical costs paid for through your company's cafeteria plan will allow you to fully deduct your medical expenses from your taxable W-2 federal and social security wages.

Make a good estimate of your projected qualified expenses for the year. If you set aside more pre-tax dollars than you will be able to claim, the unused portion is forfeited subject to the IRS rule described further below. Don't let the forfeiture risk deter you from participating, just be a little more conservative in your estimate. If you are currently enrolled in a program, review your outstanding balance, and if necessary, schedule a dentist, doctor, optometrist, chiropractor, etc. appointment before December 31st.

Contributions that cannot be applied to expenses incurred by 2½ months after the calendar year end are forfeited under the IRS "use it or lose it" rule. For example, a participant in a calendar year plan may pay for medical expenses incurred by March 15, 2009 and expenses submitted by April 30, 2009 with health care flexible spending account contributions made in 2008.

Take Advantage of Pre-Tax Parking Breaks: If your employer offers pre-tax dollars to be used for parking, mass transit or van pools, take advantage of the tax savings. Many individuals are not afforded the luxury of being able to deduct personal parking costs. Using this fringe as a component of employee compensation can create tax savings for both parties.

Preserve Student Loan Interest Deduction: Consider obtaining student college loans in the student's name instead of the parent's name where the parent's income is too large. Deferring the payment of student loan interest until after graduation may preserve the deduction for payment of interest on student loans. Most college grads start out with salaries that would allow a full deduction for the interest paid. Conversely, if the loan is in the parent's name, there is a higher possibility that the interest would be non-deductible. The parents can always make monetary gifts to help repay the loan interest.

Make a Roth IRA Contribution: If you qualify, making an annual $5,000 Roth IRA contribution for 2008 (up to $6,000 if over the age of 50 by the end of 2008) both for you and your spouse will help you accumulate tax-free wealth. You have until April 15, 2009 to fund a 2008 Roth IRA.

Self-Employed Individuals Should Consider Employing their Child(ren): Employing your child (age permitting) offers great tax-saving opportunities. Assuming your child has no unearned income, the parent could pay the child wages up to $5,450 in 2008, and the child would not have to pay any federal income taxes. The next $8,025 would be subject to a 10% tax rate. If the parents' marginal income tax bracket were 28%, the $13,475 wage deduction would generate $2,970 in federal income tax savings. Furthermore, when you employ a child under 18-years-old, neither the employer nor the employee is subject to social security tax on the child's wages. The wages your child earns will qualify as earned income for the purpose of establishing a Roth IRA. A Roth IRA will provide your child with an exceptional opportunity to accumulate money with tax-free growth.

Self-Employed Individuals with No Employees Should Consider Employing Their Spouse: A self-employed individual may be able to deduct all of his or her health insurance premiums and medical expenses by setting up a medical reimbursement plan with his/her spouse as the only employee of his/her business. Self-employment taxes could then be saved on all the deductions under the medical reimbursement plan. Your spouse must become a bona fide employee of your business. Theoretically, that means your spouse will be working under your control. Good luck.

What You Should Do Now

If you want personal attention for income tax planning, I urge you to meet with whomever prepares your tax return. If you have been meaning to come in to see me because there is a problem with your wills and trusts (like you don't have one) or you are feeling uneasy about your investments or were wondering if a Roth IRA conversion is appropriate for you, I would urge you to come in soon. For clients considering life insurance (I like guaranteed universal life that has low premiums and a high face value), I would urge you to see us for an independent analysis.

Press inquiries can be directed to my Marketing Director, Beth Bershok.

I wish you and your family a joyful holiday season and a healthy, prosperous new year.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financia PlanningKiplinger's Retirement Report and The Tax Adviser.  For more informaiton please visit

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