By Kay Bell
Bankrate.com
Every year as the days dwindle, tax advice is offered on what moves most taxpayers should make by Dec. 31 to cut their coming IRS bills. Bankrate does just that in "10 smart year-end tax moves ."
But just as important are tax moves that you shouldn't make now.
Here are four such instances that could provide better tax results for some taxpayers who wait until 2008.
1. Avoid AMT triggers. Most taxpayers by now know about the alternative minimum tax, or AMT, the parallel tax system that was created more than 30 years ago to ensure that wealthy taxpayers paid their fair share. For the last few years, however, the AMT has been snaring more middle-class filers, in large part because alternate tax system isn't indexed for inflation.
While Congress has made temporary changes to the law to address this problem, some taxpayers still find they must pay a higher AMT bill. This is usually the case for taxpayers who claim deductions that are acceptable under the regular tax system, such as state and local income taxes, as well as real estate and personal property taxes and miscellaneous write-offs, but which aren't allowed under the AMT.
"The traditional advice is to prepay state and local taxes in December. This is not a good idea if going to be subject to the AMT," says Barbara Weltman, an attorney who also writes for J.K. Lasser's tax guides. "You don't want to be paying taxes that, under the AMT rules, you won't be able to deduct."
Congress is still debating what the 2007 limits will be, but if you were subject to the AMT last year, live in a high-tax state, have a lot of personal exemptions or exercised a large amount of incentive stock options, you might get hit with the parallel tax again on your 2007 return. In these cases, don't waste your deductions by accelerating them into this tax year.
2. Don't waste deductions. Even if you're not in danger of paying the AMT, make sure you don't squander deductions. That's a distinct possibility if you don't think through your bunching strategy.
By bunching, a taxpayer pulls some deductions into the current tax year or pushes them into the next. The goal is to consolidate them in the tax year where they will exceed the standard amounts.
For 2007 taxes, that's $5,350 for single filers and married individuals filing separately; $7,850 for heads of household; and $10,700 for married couples filing jointly. In 2008, the standard deduction amounts are $5,450 for singles and married taxpayers filing separately; $8,000 for heads of household; and $10,900 for married couples filing a joint return.
"In tallying up your deductible expenses, if you come in just under that standard amount, you have to decide if you can come up with enough additional allowable expenses to push the total over the top," says Weltman.
Often, though, taxpayers don't run the numbers first; they simply take the deductions and then discover they don't have enough to itemize. Instead, says Weltman, in this last month of the year, think about whether you're going to itemize or claim the standard deduction on your 2007 return.
"Then you can decide whether to push or pull deductions that are discretionary into the tax year that will do you the most good," she says.
3. Calculate 'kiddie tax' costs. The so-called "kiddie tax" was created to ensure that parents don't shift investments to their children simply to avoid paying higher parental tax rates. Recently, the kiddie tax has been strengthened so that even more families will fall under its rules.
It kicks in when a young investor earns more than $1,700 from his or her holdings. That money is then taxed at the parents' higher rate. In 2007, the kiddie tax applies to children younger than 18; in 2008, children under 19 and full-time students under 24 also will also be subject to the kiddie tax.
That age increase means many young investors should sell their appreciated assets before the end of 2007 so that they won't be subject to the kiddie tax next year. But not all young investors should sell - if they own assets that are showing a loss and expect to face the kiddie tax next year, it might be wise to wait.
In this situation, says Bob D. Scharin, RIA senior tax analyst from Thomson Tax & Accounting, waiting to sell those assets that have lost value can offset any gains in 2008. And that could and reduce the amount of money that's subject to the higher kiddie tax rate.
As with all investments, there is a risk. By waiting, the stock value could change before the asset is disposed of, so don't make investment decisions based solely on tax considerations.
4. Wait for 2008's lower capital gains rates. Investment strategies also need to be evaluated for all lower-income investors, regardless of age. In some cases, these individuals will want to wait until Jan. 1, 2008, to sell their appreciated assets.
"Next year, the long-term capital gains for people in the 10 (percent) and 15 percent bracket will go to zero," says Weltman. "So hold off selling until 2008 when you're not going to pay any tax."
Taxpayers in the two lowest tax brackets currently pay 5 percent on long-term capital gains. To qualify for the zero rate in 2008, a married couple must make less than $65,100 in taxable income; single filers earning less than $32,550 will pay no tax on their sales of assets they've owned for more than a year.
In past tax years, parents might have given assets to their children to sell at lower capital gains rates. The kiddie tax changes, however, have ended that stock strategy for many. But you might have other family members who could benefit: your parents.
Many seniors, especially retirees who have little or no taxable income, could take advantage of the zero capital gains rate. Scharin suggest investors with appreciated long-term assets consider giving them to mom and dad to sell. And don't worry about the holding period of the gift; it's the same as the original owner's.
"If I held a stock for two years and gave it to my mother, she could turn around and sell it the next day and get the long-term capital gains rate," says Scharin. And in 2008, that would be zero.
However, even if you (or a family member) do fall within the income limits next year, not all of the gains might qualify for the zero rate. Capital gains from the sale of stocks and mutual funds are added to your income, and that additional income might lift you into a higher tax bracket. If that happens, a portion of your gains would be taxed at that higher rate, says Scharin.
And Scharin and Weltman are each quick to note that tax considerations should never be an investor's primary motivation for making market moves.
"You have to let the market dictate your selling plans," says Weltman.
Editor's Note: Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas. She also blogs about taxes at Bankrate's Taxes: Eye on the IRS and her personal blog, Don't Mess With Taxes.
