Year-End Tax Planning Opportunities are Knocking  — Until December 31st

1.

Maximize charitable giving. As a general rule, you can

Section 529 Plans Can Provide Tax-Smart Learning for Kids and Adults     Contributing to a Section 529 Plan before year end on behalf of children or grandchildren can be a wise idea. But have you ever thought about one of these tax-favored accounts for yourself — to pay for post-secondary courses you might want to take in the future?     Adults can open up Section 529 plans (also called Qualified Tuition Programs) and make themselves the beneficiaries. The plans allow you to put money in a state plan for tuition, fees, books, supplies, and equipment that are required to attend an eligible educational institution.     What's an eligible school? "It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions," according to the IRS.     That means you can generally use withdrawals to study for a second career, go to graduate school, or do coursework in retirement.     Section 529 advantages include:      Your account grows tax-free and withdrawals are not federally taxed when used for eligible education expenses.      Many states allow income-tax deductions (up to different annual maximums) for contributions to the state’s plan — and some don’t tax withdrawals.      There are no income limitations and you can put a substantial amount into a plan at one time.     What if you don't use the money? You can change the beneficiary to a family member or leave the account alone and let it become part of your estate. Another option is to withdraw the money. However, the earnings will be subject to federal (and any state) taxes, as well as a 10 percent penalty. (The penalty doesn't apply to the principal.)

Make a Last-Minute Swap of Munis     You might want to arrange a municipal bond “swap” to reduce your 2006 tax liability.     In reality, a bond swap is the simultaneous sale of one bond and purchase of another issue. Typically, you may sell a bond that's showing a loss and acquire a bond with similar investment characteristics. When the swap is complete, you're essentially in the same investment position as you were before the exchange took place.     Tax difference: Now you have a current loss that you can deduct on your 2006 tax return. And if the bond you acquire in the swap has higher interest, so much the better.     More muni bonds are usually available for exchange at year-end than corporate bonds. But the marketplace can be thin, so move quickly.     Example: Suppose you own an Apple City muni purchased years ago for $10,000. The bond's current value is $8,000. It will mature in 18 years and has a 4.5 percent interest rate. Currently, you're showing a net $2,000 gain in capital gain transactions. So you swap your Apple City bond for an Orange City muni.     The Orange City bond also has a face value of $10,000 and a current value of $8,000. However, as opposed to the Apple City bond, it matures in 20 years and has a coupon rate of 5 percent.     Benefits: The $2,000 loss from the sale part of the swap eliminates your capital gains tax for the year. Next, you get a small increase in annual income. Instead of earning $450 of tax‑free interest each year, you are entitled to receive $500 tax‑free.     Caution: Under the “wash sale” rule, you cannot realize a tax loss from a security sale if you reacquire a substantially identical security within 30 days. To avoid this, consider swapping bonds of different issuers. Or if the bonds come from the same issuer, make sure there's a significant difference in the maturity dates and interest rates.

deduct the amounts donated to qualified charitable organizations in 2007. This includes charges to your credit card made before year-end. But before giving too generously, make sure you meet the limitation and substantiation rules that can be involved with large gifts.

It may be better from a tax standpoint to contribute certain appreciated assets to charity that have been held more than 12 months. That way, you avoid paying capital gains tax but can still deduct the full fair market value as a charitable deduction.

And If you've reached age 70 1/2, there's a new tax saving opportunity you might want to consider: The Pension Protection Act of 2006 now permits you to make cash donations to many tax-exempt charities directly out of your traditional or Roth IRA. Click here for the details.
 
Caution: Household goods and clothing donated to charity after August 17, 2006 are generally deductible only if they are in good or better condition.

2.

Watch out for the alternative minimum tax (AMT), which can blindside unsuspecting taxpayers. Ask Ronald J. Cappuccio, J.D., LL.M.(Tax) to hel;p estimate your AMT for 2007. You might be able to avoid the AMT by postponing certain “tax preference items” to 2008.

3.

Take required IRA distributions. If you're due to take a mandatory withdrawal from a retirement account for 2007, don't forget to complete the transaction by December 31. Neglecting to do so could result in a 50 percent penalty on the withdrawal you should have taken.

4.

Balance investment holdings. If you’re showing a net capital gain for the year — for example, you had more stock money makers than losers — you might realize some losses before the end of the year. Losses can be used to offset capital gains, plus up to $3,000 of highly taxed ordinary income. Any excess loss is carried over to next year.

Conversely, if you have more stock losers than winners thus far, you could realize some capital gains before the end of the year. Since the gains are offset by the prior losses, they are effectively tax-free up to the amount of the losses.

5.

Secure college tax breaks. Do you have a college tuition bill that's due in early 2008? If you pay it this year, you can take advantage of the Hope and Lifetime Learning credits on your 2007 tax return, if you qualify. You're allowed to prepay for academic periods beginning in the first three months of 2008.

6.

You can deduct unreimbursed medical and dental expenses but only to the extent the annual total exceeds 7.5 percent of your AGI. That is a tough hurdle for many taxpayers. Try to “bunch” non-emergency medical expenses — such as eye exams, ongoing prescriptions and dental cleanings — this year if you expect to clear the 7.5 percent threshold.

7.

Provide more support. If you have a child in college or grad school under age 24, you can still claim a dependency exemption for the child by providing more than half of his or her support. You might decide to add a few extra dollars of support at year-end to ensure the exemption for another year.

8.

Bulk up your qualified retirement plan. Extra contributions made to the plan can help build up your nest egg on a tax-deferred basis. Plus, if you qualify, you can reduce your taxable income for the year, within limits.

9.

Consider a Roth conversion. December 31 is the deadline to convert a traditional IRA into a Roth IRA. You have to pay income tax on the amount placed in the Roth account but you escape taxes on future appreciation and earnings that accumulate. To qualify for a conversion, your adjusted gross income for the year must be under $100,000. This can be a good strategy if you are involved in a start-up business and your income is down.

Bonus: If the value of your IRA is currently down, the tax cost of converting a traditional IRA to a Roth will be lower too. What if you converted to a Roth earlier this year when your IRA was worth much more? You can change your mind by "recharacterizing" the conversion by the end of the year. Then, you'll have a regular IRA again.

Once you recharacterize to a regular IRA, you can switch back or "reconvert" to a Roth IRA and owe a lower tax bill. But you have to wait 30 days after the recharacterization, or until the next calendar year, whichever is later.

Remember: Converting an IRA increases your adjusted gross income, which can make you ineligible for certain tax breaks. A boost in your income can also make some or more Social Security benefits taxable. The rules are tricky so consult with your tax attorney.

10.

Be energy efficient. During 2007 individuals can make energy-conscious purchases that provide tax benefits. Two limited tax credits are available for expenditures to improve the energy efficiency of existing homes and include outlays for items such as storm windows, insulation, electric heat pumps and solar panels.

This is just a brief overview of ten year-end techniques. Here are a couple more tax-saving considerations for 2007. Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121  can provide more information for your situation.

2007

Shift a child’s investments into tax-free or tax-deferred vehicles to minimize “kiddie tax” complications. A new rule: For 2006 and after, investment income above $1,700 received by a child under age 18 is taxed at the top tax rate of the child’s parents. Before 2006, the tax only applied to children under age 14.

2007

Think about consolidating personal debts into home equity debt. Although interest on personal debt can’t be deducted, you can write off the mortgage interest paid on the first $100,000 of home equity debt, even if the proceeds are used personally. But be careful: A home equity loan must be secured by your residence.