.htm_cmp_willow000_vbtn.gif){kind=small}
November 29, 2007
YEAR END TAX SAVING ACTIONS
With one month left before the end of the tax year, it’s time to take a look at how you might reduce your income taxes. When it comes to income taxes, timing becomes very important. By timing, I am referring to deferring income and accelerating deductions and credits.
Most taxpayers are on the cash basis. This means that if you receive income or pay an expense during the calendar year, that is the tax year that you are required to report the income or expense. To reduce your tax burden there are 2 rules. Rule number 1 is to defer income to after December 31 and rule number 2 is to accelerate your deductions to prior to that date.
Most taxpayers are unable to defer their income because they do not control when their income checks are received. However, there are some planning options. Waiting until January to take a large distribution from your IRA or retirement plan will cause the distribution to be taxed in the following year. If you normally receive a year end bonus, electing to wait until after December 31st will also defer recognition of the income. Deferring income until the following year make sense if your tax bracket will be the same or less in the following year. You don’t want to unnecessarily bunch income in one year.
You also might want to think about accelerating deductions to make them deductible this year instead of waiting to pay them next year. Instead of waiting until January to pay your Massachusetts estimated tax, pay it in December and deduct it this year. You could to the same with your real estate tax bill that is due in January, unless you are subject to the Alternative Minimum Tax that disallows the deduction for real estate taxes. The same principle applies to charitable contributions and medical expenses. You might also consider paying for your medical expenses with a credit card. Even though you don’t pay your credit card bill until the following year, as long as the charge occurred prior to January 1, it is deductible this year.
If you have some extra cash and are thinking about putting it to work for you in a mutual fund. Wait until January. Most mutual funds pay out their capital gains and dividends in December. When these funds make these payments, the value of the fund drops by the amount of the distribution. Waiting until January will allow you to avoid taxes and buy the fund at a lower price.
For those of you that have reached age 70 ½ during 2007, it’s time to take a look at your IRA account to be sure that you start taking distributions from your IRA. Failure to withdraw at least the “minimum required distribution” will subject you to one of the more draconian IRS penalties. Failure to take out the minimum required distribution will cause a 50% penalty of the amount that you were supposed to take out.
Finally, time is running out on the Federal energy credits. Insulation, exterior windows and doors, and some metal roofs can get you back as much as $500 in energy credits. The purchases must be made by December 31st and be for your home. The credit is equal to 10% of the cost of the improvements and no more than $200 of the credit can be claimed for new windows.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org