While these tips apply to 2008 tax returns (both calendar and fiscal year), some suggestions must actually be implemented before the year-end, while others can be done next year, when your actual tax return is being prepared. So don’t just use this to line a bird-cage when December 31st rolls around….

Overview

Tax planning primarily concerns the timing and the method by which income is reported and deductions and credits are claimed. The basic strategy for all year-end tax plans is to time your income so that it will be taxed at a lower rate — and to time your deductible expenses (and any tax credits) so that they can be claimed in a year in which you are in a higher tax bracket. The tax planning rules are simple (while their execution may be more complicated). They may be summed up as:

• Postpone payment of taxes whenever possible.
• Recognize income in a year with the lowest possible tax rate.
• Pay and deduct expenses (and claim any tax credits) in a year with the highest possible tax rate.

While I rarely make predictions (mine come back to haunt me and are usually wrong), I predict taxes will be higher in 2009-2010 — no matter who wins the election. I base this primarily on two factors: (1) the unbelievable size and still mounting federal deficit; and (2) the indefinitely continuing occupation of Iraq. Oh well…I’ve been wrong before….

Another prediction, since I write well in advance of publication month, I predict there will still be another tax law before December 31st and it will include the usual “patch” on the AMT, to keep it from hitting too much of the middle class. So there!

Despite my opinions, here are the classic ways to swing taxable income to 2009 from 2008 — in case you disagree with me (as many usually do):

Defer Taxable Income to 2009

Many of you can make various arrangements that will delay December 2008 bonuses, salaries, commissions and fees until January 2009. If you are self-employed, postpone sending out further bills until January 2009. Don’t cash any savings bonds until next year. Delay all legally possible retirement plan distributions or dividend payments, and stay the exercising of stock options until next year.

Accelerate Tax Deductions to 2008

This has the same tax effect as deferring income to 2009, since it decreases your 2008 net taxable income by the amount of the increased deductions. The most obvious ones you can control and accelerate are: (1) charitable contributions (the best, most flexible, and discretionary); (2) real estate tax installments; and (3) state income tax payments. However, those last two tax deductions can help trigger the Alternative Minimum Tax (AMT), so don’t overdo them, until you get some expert advice. Further, you can make your January 2009 mortgage or home equity payment in December 2008 to increase your 2008 interest deductions (but do it early enough in December, so that it is reported to the IRS on Form 1098 as a year 2008 payment).

TAXTIP: You can always augment your state income tax deduction, if you simply increase your state tax withholding in the last periods of the year. We have had some clients triple and quadruple their end-of-the-year tax withholdings — and a few desperate individuals have even applied 100% of their December salaries as withheld income taxes! This technique is also used to avoid underpayment penalties at both the federal and state levels, since all withholding is considered to be paid in evenly (“ratably”) over the year — regardless of when it is actually withheld.

For cash-method taxpayers (almost all individuals and many businesses), an expense is deductible when “paid.” Checks should be dated and mailed before January 1. Credit card charges made before January 1 also qualify — even though the credit card company is paid next year (or the year after…or the year after that…for some of you). Giving a seller or service provider an IOU does not create a tax deduction for you cash-basis folks. Accrual-method businesses can generally deduct expenses when there is: (a) an obligation to pay and (b) “economic performance” has taken place.

“Bunching” Certain Tax Deductions

In two special cases, the excess of certain expenses are only deductible above their (non-deductible) “floors,” which represent a percentage of Adjusted Gross Income (AGI). For medical expenses the floor is 7.5% of AGI and for miscellaneous itemized deductions, (which includes unreimbursed business expenses (unless you are a “statutory employee”), the floor is 2% of AGI.

Assorted TAXTIPS for Year-End Tax Planning

Be aware that for calendar-year partnerships, estates and trusts filing their 2008 Forms K-1 there is now a one-month reduction in the time they have for filing their tax returns on extension. For example, this means that all partnership Forms K-1 for the calendar year 2008 must be filed by September 15, 2009 (instead of October 15, 2009). So, for the first time you will have at least one month to use these forms in completing your personal income tax return (if on extension) until October 15, 2009. Under prior law there was no time difference between the two deadlines — which drove many taxpayers and their CPAs nuts!

For first-time home-buyers that purchased homes on or after April 9, 2008, and before July 1, 2009, there is a temporary refundable tax credit possible, equal to 10% of the purchase price of the home — up to $7,500. The credit begins to phase out for taxpayers with adjusted gross income (AGI) of $150,000 (joint return) or $75,000 (others). A “first-time homebuyer” is defined as one that had no ownership in a principal residence during the three-year period before the new home was purchased. Two or more unmarried individuals may purchase the home and qualify for the credit (IRS will prescribe how the credit must be allocated), but the total cannot exceed $7,500. The definition of “purchase” for this new credit occurs when title closes and one cannot acquire the property from certain related persons (nice try!).

MORE ON PRECEDING TAX CREDIT: The individual(s) must claim the credit on a 2008 or 2009 tax return. If the purchase is made in 2009 and after the 2008 tax return has been filed, the taxpayer has the option of filing an amended 2008 tax return to claim the credit. CAUTIONS: A new twist in the tax law, this credit must be repaid to the IRS in equal installments over 15 years, interest free (a good deal!) Repayments must begin two years after the purchase of the residence in 15 equal installments. If the home is sold or no longer used as the principal residence, the unpaid balance becomes due in the year of sale. However, in that event, this recaptured credit due the IRS cannot exceed the amount of gain from the sale of the residence to an unrelated person. The credit does not have to be repaid if the taxpayer dies.

A possible new deduction, available only for 2008: If you are a non-itemizer of your tax deductions, your standard deduction is increased by the lesser amount of (a) real property taxes paid during the year or (b) $1,000 (joint) or $500 (others). CAUTIONS: That’s the lower of these two and not an option that you can choose from. If applicable, this is in addition to the regular standard deduction and not a possible deduction from AGI.

At the request of military personnel, mortgage lenders must reduce their mortgage interest rates to no more than 6% a year during the period of active military service and recalculate the payments to reflect the lower rate. There are also temporary enhanced protections against foreclosures for these same individuals.

All sellers of real property must now sign an affidavit that they are not nonresident aliens or they must be subject to tax withholding. They must include their social security or other tax identification numbers.

Effective on or after January 1, 2009, the period that a home was not used as a principal residence reduces the normal total exclusion from gain of up to $500,000/$250,000 that is usually available. Use as rental property or as a vacation home after 2008 (of what was the principal residence) will result in a pro-rated and reduced maximum of the possible tax-free amounts.

Increased “Section 179 depreciation” of up to $250,000 is only available to property purchased and placed in service in tax years beginning in 2008. Thus a calendar year filer of 1/1/08 to 12/31/08 will cover all such 2008 acquired properties and have no problem with the deduction. But…for you fiscal-year taxpayers it’s a little trickier. Assets acquired in 2008, but before the beginning of your 2008-2009 fiscal year will not qualify for this new write-off. Conversely, assets acquired in both 2008 and 2009, but within the fiscal year beginning in 2008 will qualify. (See earlier articles for more details.)

Additionally, new “bonus depreciation” can then be claimed on the remaining balances. In simple terms, this one means that virtually any qualifying depreciable asset (e.g., equipment, furniture, etc.) can qualify for an immediate tax deduction of 50% of the total cost of all those items. The asset must be purchased and placed in service during the calendar year of 2008 only. (That’s January 1, 2008 — December 31, 2008.) There is no limit on this 50% tax deduction. If you bought $10 million of new equipment the immediate bonus deduction would be $5 million. Fiscal year filers will be able to claim the 50% bonus depreciation (as well as, of course, calendar year filers.) However, any fiscal year bonus deduction is limited to assets acquired during 2008 only (from January 1, 2008 to December 31 2008) — and not those acquired during their entire fiscal year. (Again, see earlier articles for more details.) CAUTION: Many states, including California, have not adopted either of the preceding new write-off options, so it’s frequently just a federal tax deduction (which means two sets of depreciation records and more work for us accountants).

Donations from your IRA directly to charity: There are absolute requirements to take advantage of this option: (1) you must be age 70 ½; (2) you can contribute up to a maximum of $100,000 in each year; and (3) payment must be made by the IRA trustee directly to a qualified charity. The distribution is tax-free to you, but you do not get a charitable tax deduction. If you are an individual that desires to make charitable contributions of this magnitude, this may be an excellent idea. See your tax advisor to analyze both your income and estate tax positions.

Make your $24,000 (married) or $12,000 (others) tax-free annual gifts to as many individuals as you choose. Among other benefits, it will reduce potential estate taxes in the future. There is no carryover of this annual gift tax exclusion. Use it or lose it — before December 31st.

Whenever possible, make every charitable contribution in the form of appreciated property that you have held over one year. You generally get a tax deduction for the full market value of the property and there is no longer any alternative minimum or regular tax to worry about in this particular case. (Excess deductions exceeding 50% or 30% of your current AGI can be carried over for an additional five years.) On the other hand, if you have property that has decreased in value (e.g., most stocks that I buy), always sell it yourself, so that you can claim the tax loss personally — and then contribute the cash proceeds from the sale to charity (if you wish).

Legal fees paid by individuals can represent a tax deduction, if you can get your lawyer to itemize the bills, to separately indicate tax-deductible amounts paid for: (1) general tax advice, including services related to estate tax planning; (2) obtaining or maintaining alimony awards; (3) relating to income-producing property, or investments; (4) tax advice related to a divorce.

Contribute the new higher maximums to any and every kind of retirement plan. This should be among your very highest priorities.

You must “establish” your Keogh (H.R. 10) or Solo 401(k) plan by December 31, 2008, if you want to claim such a tax deduction for the year 2008 — you cannot wait until April 15, 2009. Once created, you can pay the bulk of the contribution in 2009 — and still claim a full 2008-tax deduction.

Claim any worthless bad debts and losses from Section 1244 business stock. Any Section1244 losses represent an ordinary (not capital) loss deduction up to the annual limits $100,000 (joint tax return, $50,000 (others) and thus are quite valuable. Claim any other worthless bad debts. If possible sell any worthless or near worthless securities (say for a $1 or $10), as this positively establishes both your exact loss and the year.

If you have unused passive losses which have been carried into 2008 (frequently from real estate limited partnerships) and you would like to claim them in 2008 (because this is a high-income year, or for other reasons), consider this option: If you sell the activities with the suspended losses in 2008, those losses then become “ordinary” losses and can be used to offset all your ordinary income this year! TAXTIP: You must sell to an “unrelated third party” or this idea will not work, but your son-in-law or daughter-in-law are both considered unrelated third parties (as is your CPA).

Hire your children to work in your business… this is almost always worthwhile… and they can establish a Roth IRA with those earnings, or help pay for their college education.

Business start-up costs of over the first $5,000 must now be written off over 15 years instead of 5 years. However, the first $5,000 can now be deducted immediately. There are two categories covered by this provision: “organization costs,” incident to the creation of a corporation or organization of a partnership or LLC, and “start-up costs” that are business expenses paid before the business began.

If your income is too high to qualify for education tax credits (to which you are otherwise entitled), consider not claiming that student as a dependent. Then the student may be able to claim the education credit (depending on his/her income), even though you actually paid the tuition.

If you are reporting huge capital gains in 2008 (e.g., sale of your business), or very high ordinary income, consider making a very substantial state income tax payment (by estimate or extra withholding) before December 31, 2008. This “matches” the extra-large income with an extra-large itemized tax deduction in the same year and is far more beneficial than having that big state tax deduction in 2009 — when your income may be much lower, and a huge state tax deduction in 2009 could easily make you liable for the Alternative Minimum Tax (AMT). CAUTION: If that huge capital gain throws you into the AMT — forget this advice, as the state tax deduction is disallowed in that event.

The standard business mileage rates for 2008 are 50.5¢ (January 1-June 30, 2008) and 58.5¢ (July 1-December 31, 2008). This applies for both tax-free reimbursements and tax-deduction purposes. If you have been reimbursing employees at a lower rate per mile, you could retroactively (to January 1, 2008) increase their reimbursements to the higher limits — tax-free. This could even represent a tax-free Christmas bonus, or be paid in lieu of (taxable) salary. Also effective July 1, 2008, both medical and moving expense mileages are increased from 19¢ to 27¢ a mile. Charitable mileage cannot be changed by the IRS (only Congress can do so), so it remains at 14¢ a mile.

Remember — all cash donations to charity must now be documented — from $1 up! A cancelled check, credit card receipt, or a written confirmation from the charity is mandatory. For donations of $250 and up you must obtain a charity-provided acknowledgment.

If you own “nonqualified stock options,” (NQOs) consider whether it may be prudent to exercise them (all, or a portion) in 2008. This action will generate taxable income, so from both a tax and investment perspective — get expert advice as to whether this is a smart thing to do.

The exercise of “incentive stock options” (ISOs) generally does not trigger regular income taxes — but can subject you to the AMT on the” bargain element” of the option. If you qualify — you will again need some expert advice as to in what year and how much to exercise. (Personally, I don’t have this problem — as I exercise very little.)

Taxpayers can elect to either deduct state and local income taxes or sales taxes — whichever is higher.

If you refinanced your home mortgage in 2008, the general rule is that any points paid on a re-fi can only be deducted ratably (i.e., evenly) over the life of the loan. However, if the new loan proceeds were used entirely to improve your principal residence — you can deduct the entire points paid in 2008. (If part of the proceeds were used for home improvement, you can immediately deduct that pro-rata share of the points.)

Verify that you have substantiated all your reimbursed business expenses with your employer, or do so immediately. Unsubstantiated business expense reimbursements will end up being reported as additional income on your Form W-2. As a general rule, expenses should be substantiated within 60 days after they are incurred and excess reimbursements repaid to the employer within 120 days.

Some investors think that because the interest earned on municipal bonds is tax-free — that any losses on such bonds cannot be deducted. Any loss on the sale of the actual bond represents a tax-deductible capital loss. Consider “bond swapping.” If you have tax-exempt bonds that have gone down in value, you can sell them to obtain that tax loss. Then, you buy back similar (not absolutely identical) bonds that deliver about the same amount of steady income. And voila — you have a tax-deductible loss and the same income as before.

Remember the current rules regarding the sale of your principal residence. If you qualify, you can pocket, tax-free, gains of up to $500,000 (joint tax return) or $250,000 (all others)…every two years.

Exchange business or investment property for “like-kind” property — tax-free. This option (IRC Sec. 1031) lets you take the profit on one piece of property and roll all the proceeds over into another (higher value) property, without incurring any tax on the gain. (However, you cannot do a 1031 exchange of your stocks and bonds.) This technique has been used with incredible success. Some of the largest real estate fortunes in the country have been created by using this concept (along with the tax-free and steady refinancing of increasingly valuable properties…to buy more properties). Consult an expert.

Also check out the newer Sec. 1031 exchange rules that now let you swap your property for fractional interests in: real estate syndications, tenants-in-common investments and the like. CAUTION: A lot of high-pressure salespersons are suddenly peddling tenants-in-common swaps, so be careful! And many of them are holding free seminars about these particular swaps — which makes me very nervous — like the old days when they sold “tax shelters” the same way….

Accelerate advertising expenditures to maximize your tax deductions. Whatever is spent (whether cash or accrual basis) for general advertising is fully deductible in 2008 — even if the primary benefit from the advertising is obtained in the following year.

Businesses can write down obsolete or damaged inventories to their reduced market values (this will decrease the profit for the year). To accomplish this, within 30-days after the inventory date, such items must be offered for sale at the price to which they were written down. (CAUTION: This method cannot be used for those on the LIFO method of inventory valuation.) For excess or slow-moving inventories, they must be actually disposed of before any reduction in value can be claimed…so consider doing so quickly.

If you have business travel scheduled for early next year, and you have some leeway in scheduling the dates — consider moving the travel into this year to accelerate your tax deductions.

If you are covered by a qualifying high-deductible health plan, you can make a deductible contribution to a Health Savings Account (HSA). Then use your HSA to reimburse yourself for qualifying out-of-pocket medical expenses. There are generally larger deductible HSA contributions for 2009. Also, you may qualify to roll over amounts from your employer’s health care flexible spending account (FSA) plan or health reimbursement arrangement (HRA).

While we usually refer to the current long-term federal capital gains tax rate as (a maximum of) 15%, here is a reminder of some special rules. The sales of “collectibles” (e.g., works of art, stamps, coins, rugs, gems, antiques and similar) are taxed at a maximum federal tax rate of 25% — and not 15%. Further, there is a special rate of 25% applied to some of the profit from real estate sales, to the extent that profit is the result of depreciation previously claimed. Sometimes, the entire profit is represented by that depreciation recapture and thus taxed at a federal 25% — to the chagrin of many unsophisticated taxpayers.

Long-term capital gains are defined as capital assets held over one year before the sale or other disposition. In other words, at least a year and a day… or more.

Try to take capital losses to offset short-term capital gains (capital assets sold in one year or less). In that manner you are offsetting the losses against income taxable at up to 35%. If you offset those losses against long-term capital gains, you are reducing income that is only taxable at a maximum of 15% anyway.

In general, try to balance amounts of capital gains and losses for the year — since capital losses are fully deductible only against capital gains. In addition, you can deduct $3,000 each year of excess capital losses against all your other income (and any losses of more than the $3,000 can be carried over to future years indefinitely).

If you inherited investment property from a decedent, any gain from the sale of that property is always a long-term gain — even if it was not held for over one year by you. This is because of a special rule, under IRC 1223(11). Also remember that the inherited property currently gets a tax basis equal to the fair market value on the date of death — and not the original cost.

You have the option of reporting your capital gains using the installment method of tax reporting — if payments are going to be received in more than one year. This permits you to pay the tax as you receive the payments, rather than all in the year of the sale. (You cannot use this for the sale of publicly traded stocks or securities.) CAUTION: However, if real property is being sold on the installment method — you still must report all of the profit to the extent provided by prior depreciation deductions in the year of sale (and at 25%, see earlier). This can represent a huge tax trap that catches many taxpayers by surprise.

Conversely, if you already have an installment note and 2008 is a low-income year — you can try and accelerate all that future years’ installment income into 2008. Any of these methods will work: (a) if the buyer agrees to pay off the note before year-end (perhaps with a discount); (b) you sell the note to a third party; or (c) you use the note as collateral for a loan.

The Wash-Sale Rule and How to Avoid It

You cannot claim a current loss for the sale of a stock (or other security), if within 30 days before or after that sale — you buy the same (“substantially identical”) stock or other security. Here are three ways to avoid the wash-sale rule (and one that no longer works):

Sell the stock you hold and then wait 31 days to buy it back. Your risk is that the stock will go up during the 31-day waiting period.

Buy more of the stock first and then sell the older stock 31 days later. Your risk is that the stock will decline during the 31-day waiting period.

Simultaneously sell and buy the stocks of similar companies, which avoid the wash-sale rule completely — since they are not considered “substantially identical” (e.g., you simultaneously sell General Motors stock and buy Ford…or maybe Studebaker and Pierce-Arrow). Then, after 31 days, you can sell and buy back — to restore your original position (if you wish).

The IRS has finally ruled (after some years of deliberation) that the wash-sale rule does indeed apply in a case where you personally sell 1000 shares of XYZ stock at a loss — and simultaneously buy 1000 shares of XYZ in your retirement plan (or visa versa). SO, that loophole has been plugged.

Conclusion

In general, when buying stocks, remember the sage advice from Mr. Mark Twain: “The way to make money in the stock market is to only buy the stocks that will go up…and if they don’t go up…don’t buy them.”