– Your Taxes — Plan To Pay Less
– Checking Out a Charity
– Rate Reduction Is a “Capital” Gain
as Tax Time Approaches
Your Taxes — Plan To Pay Less
You may be thinking, “Taxes? But it’s not even the holidays yet!” True.
But year end tax planning starts long before April 15. If you plan ahead, you
may be able to reduce the amount of money you’ll owe Uncle Sam for 2007.
How? Paying some deductible expenses early and deferring taxable income until
a later year may lessen your 2007 tax liability. Read through the commonly used
tax strategies below to identify those that might benefit you in your year-end
tax planning.
Make Your January Mortgage Payment Early
You may be able to deduct the interest portion of your January 2007 mortgage
payment on your 2007 tax return if you make the payment by December 31.
Give to Charity
with Your Credit Card If your favorite charity accepts
donations on a credit card, charge your contribution by December
31. The IRS considers the date the donation was charged to
your card to be the contribution date. You can claim the
deduction on your 2007 tax return but won’t have to
pay the bill for another month or two.
Donate Items You
Aren’t Using
You can deduct the fair market value of clothing, furniture, household, or other
items that you donate to a charitable organization on your tax return. Be sure
to list each item and ask for a receipt.
Put Money in a Traditional IRA
You have until April 15, 2009, to contribute up to $3,000
($3,500 if you’re age 50 or older) to an individual
retirement account (IRA) for 2007. All or part of your contribution
may be tax deductible, depending on your income and filing
status and whether or not you or your spouse is covered by
an employer’s retirement plan.
Max Out Your Retirement
Plan Contribution
You generally don’t pay current taxes on salary
deferral contributions you make to your employer’s
retirement savings plan, so contributing the maximum amount
allowed can lower your tax bill. If you’re age 50 or
older and your plan allows, you can save even more on taxes
by making “catch-up” contributions to your account.
Bunch
or Defer Medical Expenses
You may be able to exceed the 7.5% of adjusted gross
income (AGI) floor that applies to itemized medical deductions
by scheduling and paying for medical or dental procedures
in 2007 that you planned for early 2009. If you won’t
exceed the floor this year, defer any expenses you can until
2009.
Bunch or Defer Miscellaneous Expenses
By prepaying 2009 investment and employee business expenses
in 2007, you may be able to exceed the 2% of AGI floor that
applies to miscellaneous itemized deductions. If you won’t
exceed the floor this year, deferring payments until 2009
might help on next year’s return. Your financial professional
can help you determine which strategies are appropriate for
your personal and tax situations.
Checking Out a Charity
When you make a charitable donation, you want to know that the charity is worthwhile
and that your money will be well spent. But some organizations use a large percentage
of the donations they receive for administrative and fundraising costs and spend
surprisingly little on program activities. Even worse, some solicitations you
receive could be outright scams.
Know the Caller
It may be hard to say“ no” to a direct appeal,
but be very wary of phone solicitations. First of all, you
may be talking to a scam artist who just wants to get a hold
of your credit card account number. Secondly, charities that
use telemarketers may be spending too much on fundraising costs.
One source you may want to consult is the Better Business Bureau’s
Wise Giving Alliance (www.give.org).
The site contains information on more than 600 charities.
Request Information
If you think you may want to help out a charity that has
called you, ask them to send you written information. Be suspicious
if they say they’re unable to mail you anything. If a
caller asks you to help out a police or firefighters benevolent
association, call your local department to see if it has an
official foundation or benevolent fund to which you can contribute.
Watch Out
for Sound-alike Names A common scam is for a bogus charity
to use a name that sounds a lot like the name of a legitimate
charity. Find out the charity’s exact name and the address
of its headquarters. Then check it out.
Get IRS Information
If you have doubts about a charity, you may want to review
the organization’s Form 990— the IRS form that
details how a charity allocates its expenses (administrative
costs, salaries, program events, etc.). You can access information
on over 850,000 organizations on Guidestar (www.guidestar.org).
Rate Reduction Is a “Capital” Gain
as Tax Time Approaches
Have you been thinking about taking your profits on a stock that has increased
in value since you acquired it? Now might be a good time. Last May, the Jobs
and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Act”)
lowered the tax rates on certain long-term capital gains. The lower rates mean
that selling an appreciated asset may have less of an impact on your taxes than
it would have before the new law was passed.
Ring Out the Old
Prior to the 2003 Act, net capital gain was taxable at a maximum rate of 20%,
with a 10% rate for gain that would otherwise be taxed in the 15% or 10% bracket
if it were ordinary income. To take advantage of these rates, you must have held
the asset for longer than one year. Even lower rates applied to assets held longer
than five years — 18% (for assets with a holding period starting after
2000) and 8%, respectively. If the companies in which you owned stock paid out
dividends to shareholders, those dividends were taxed to you as ordinary income.
Tax rates on ordinary income were as high as 38.6% before the 2003 Act’s
rate changes.
Ring In the New
But the 2003 Act brings some much-needed
good news to investors. It reduces the 20%
and 10% rates on long-term capital gains to
15% and 5%, respectively, for assets sold on
or after May 6, 2003, through the end of 2009.
In 2009, the 5% rate drops to 0% for lower
bracket taxpayers.* Individuals who own dividend-paying
stocks will benefit as well. The 2003 Act makes
qualifying dividends taxable at the same rates
as net capital gains. Investors may find incomeproducing
stocks more attractive because of this tax-rate
cut. The lower tax rates on dividends are effective
for 2003 through 2009.
Down the Road
After 2009, the tax rates on dividends
and capital gains will revert to the former
rates. It will then be up to Congress to decide
what happens next. Your financial professional
can review your portfolio to help you determine
the best course of action for your situation.
* As under prior law, different rates apply to gains on certain types of assets
(collectibles, for example).
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