Tax Update Blog: 2007 Year-end Planning Archives
LAST DAY OF THE YEAR CHECKLIST
December 31, 2007
There's no extension for this deadline. The tax year ends at midnight tonight, and with it ends most of the best opportunities to reduce your 2007 taxes. If you are so inclined, here are a few things you can do yet today:
- Sell loser stocks to offset capital gains, plus $3,000.
- Make a charitable donation by check or credit card.
- Make an annual exclusion personal gift, if the funds or assets transfer today. A check written today that doesn't clear until next year is considered a 2008 gift.
- If you are a cash-basis taxpayer, any deductible expense in a check mailed today or charged to a credit card today is deductible this year.
- If you are an accrual method taxpayer, be sure to make checks today for any related-party expenses that you want to deduct this year.
- Today's the last day to establish a qualified retirement or profit-sharing plan if you want a 2007 deduction.
- If you have an S corporation with current losses, a capital contribution or loan by you to the corporation today may allow you to deduct your loss this year.
- If you're in love, or are falling out of love, remember - your filing status at the end of the year is your filing status for the whole year.
See you in 2008!
This is the final installment of our 2007 year-end planning series.
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EXTREME YEAR-END TAX PLANNING
December 30, 2007
The Tax Update's 16-year old son is the bass player for a little jazz combo. They had their first wedding gig last night, which makes my romantic mind ponder whether the happy couple could have paid the band with their tax savings had they put off the wedding for a week. It matters - your marital status on the last day of the year is your status for the entire year, for tax purposes.
Congress attacked the marriage penalty with much fanfare a few years ago, but as with most things politicians talk a lot about, it was more talk than action (it's the stuff they don't talk about that really causes trouble). They did get rid of the marriage penalty for the 15% tax bracket, but at higher income levels, getting married still carries a tax penalty. If our happy couple were both upwardly mobile professionals with taxable incomes of $74,200 in 2007, getting married in 2007 would cost them $597 - and that goes a long way towards paying the band.
In addition to the penalty built into the rates (and, some misanthropes would say, into the institution), there are some other tax penalties to marriage. These include a quicker phase-out of itemized deductions and a reduced ability to deduct capital losses.
So if tomorrow is the day you and yours plan to yoke your fates together, best wishes - especially if you try to convince her to wait a week to save on your taxes.
And if you are the person who found the Tax Update with the Google search, "how much tax savings for a new baby before year end," now that's extreme tax planning. But go for it! A baby born today or tomorrow gets you the same 2007 $3,400 dependent exemption and $1,000 child credit as one born last March. Or you can at least get started on next year's tax planning.
Now, ladies and gentlemen, get ready to ring out 2007 with The Saturn V:
This is the penultimate installment of our 2007 year-end tax planning series.
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CHARGE!
December 29, 2007
Yesterday's post explained how "the check is in the mail" rule works for getting deductions this year. But who uses checks anymore? All those new economy whippersnappers use credit or debit cards or online transfer services like Paypal to pay their bills. When does a cash-basis taxpayer -- and that means almost all humans -- get deductions for those transactions?
For expenses charged to a credit card, the expense is deductible the day the expense is charged to the card -- not the later date when you pay the credit card company.
If you use a debit card or Paypal, the deduction likewise should occur for tax purposes at the time of the initial transaction. A debit card immediately transfers funds from your bank account, while Paypal either debits your bank account or charges your credit card, giving you the deduction either way.
There are two more installments in our series of 2007 year-end tax planning posts, assuming 2007 isn't extended. Collect them all!
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YEAR-END DEDUCTIONS: IS THE CHECK IN THE MAIL?
December 28, 2007
Yesterday we talked about how "the check is in the mail" doesn't cut it for estate and gift tax purposes.
Fortunately, a looser standard applies for income tax purposes. If a cash-basis taxpayer wants to claim a deduction for income tax purposes, it's normally good enough to have the check in the mail by December 31 this year to claim your deduction.
There are exceptions, of course. Having the check in the mail obviously doesn't create a deduction for something that's not deductible to begin with. Also, it doesn't override the related-party rules, so a check to an expense due a related party either has to be included in that party's income in the year the check is written, or the deduction has to be deferred until the income is reportable.
But for the most part, having the check in the mail gets you the deduction. If the deduction is a big one, it's wise to send the check using certified mail, return receipt requested, to prove that you mailed the check. It's worth the extra postage to avoid trying to explain to the IRS why a charity didn't bother to cash that big check until March.
There will be three more installments in our 2007 year-end tax planning series. Don't miss any!
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WHEN IS A GIFT COMPLETED?
December 27, 2007
So far in our 2007 year-end tax planning series, we've talked about things you have to do for year end. We haven't really talked that much about exactly how you get some things done.
One area where getting something done by year-end is critical is the gift tax area. If you fail to use your $12,000 per-donor, per-donee annual exclusion for 2007, it is lost forever. That means you have to make sure you complete your annual exclusion gifts before the clock strikes 12:00 January 1.
The check has to clear to complete the gift. If you write a check for a $12,000 gift on December 31, 2007, but the recipient doesn't cash it until January 2008, it is a 2008 gift. The IRS says a check isn't a completed gift until it is cashed.
So if you want to give somebody a check as your year-end gift, you'll want to give them a cashier's check before year-end. The tax law calls that a completed gift because there you can't stop payment on a cashier's check.
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WHEN DO I HAVE TO PAY AN EXPENSE TO DEDUCT IT?
December 26, 2007
The headline of this post is one of the more common search phrases used to reach the Tax Update from search engines. The answer? As with so many things in the tax law, it depends.
In general, if you are a cash-basis taxpayer, you have to pay your business expenses by the last day of the year to deduct them. If you are an accrual-basis taxpayer, you have to clear the "all-events test" -- that is, all events to determine the liability must have taken place by year-end, and the liability must be determinable with reasonable accuracy.
But that it would be so simple. For example, even cash-basis taxpayers may deduct deduct contributions made after year-end to qualified retirement plans that are set up by year-end, as long as the contributions are made by the due date of the tax return.
Most of the time, though, the tax law looks to limit your ability to deduct expenses paid after year-end. For example, even accrual-basis taxpayers can't deduct expenses accrued to "related" cash-basis taxpayers (read the extended entry by clicking "read more" to see who these relatives might be). Such expenses are deductible to the accrual basis taxpayer only when the related cash-basis taxpayer has to record the income. Even when unrelated parties are involved, the expense is deductible only if "economic performance" has occured. That exception to the "all-events" test itself has an exception, the "recurring item exception."
Compensation is normally deductible for accrual-method payors if the expense is actually paid within 2 1/2 months of year-end. When the recipient is a related party, though, the expense is deductible only in the year paid.
Finally, even expenses paid before year-end normally are non-deductible if they purchase a benefit that goes out beyond one year. If, for example, you prepay your tax fees for five years (an idea that I would always encourage for my own selfish reasons), you would only get to deduct the amount for the next 12 months. The remaining prepayment would be capitalized and deducted in the year to which it applies.
So for your year-end planning, this means:
- You have to pay related cash-basis taxpayers by year-end to get the deduction this year.
- You have to have your qualified plan set up by year-end to deduct contributions for this year, but you have until the return due-date to make the contributions.
- Don't overdo prepayments (except perhaps to your friendly tax preparer). If you prepay beyond one year, such prepayments aren't currently deductible.
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A TAX TIP FOR CHRISTMAS
December 25, 2007
We promised a tax planning post each day through December 31, and we keep even ill-considered promises at the Tax Update.*
In the spirit of the season, we'll just note today that if a charitable contribution is billed to your credit card in 2007, it is deductible in 2007 - even if you don't pay the bill until 2008.
If you are in a giving mood, here are links to some worthy charities that will take online credit-card donations:
Salvation Army
Heifer Project
Soldiers Angels (assists armed forces members and their families)
USO
Iowa Donor Network (Iowa's organ donation facilitator)
Hospice of Central Iowa
Merry Christmas!
*In case you think we're crazy, we're keeping this promise through the miracle of "scheduled postings."
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PAY EXTRA TAX THIS YEAR? ARE YOU CRAZY?
December 24, 2007
Tax advisors spend a lot of time looking for ways to punt income into the hereafter. It almost feels like heresy to suggest accelerating income. Yet in some narrow circumstances paying extra tax this year can save you money.
One example we see occasionally arises from the way the AMT exemption phases out. For 2007, the AMT exemption is $66,250 on joint returns, but it is reduced by 25 cents for each dollar adjusted gross income exceeds $150,000. This creates a hidden extra bracket for the AMT. While the stated top rate for AMT is 28%, the phase-out makes the real top rate 35% until the entire exemption is phased out (at AGI of $415,000 for joint filers). The phase-out also cause an extra hidden bracket on long-term capital gains, which are otherwise taxable at 15%.
If you have an item of taxable income that you can choose to take in either 2007 or 2008 (lucky you!), you might be better off taking the income this year and paying the tax sooner. It works if:
- Your 2007 income is already above the AMT exemption phase-out amount
- You will be subject to AMT in 2008, and
- Your 2008 income will be in the phase-out range.
A simplified example of an Iowa married couple illustrates this. The couple has $500,000 of 2007 income and will have $200,000 of 2008 income. They have another $100,000 of capital gain income they can choose to take in either year. They have two children, and their only itemized deduction is state income taxes.
If they take the $100,000 in 2007, their combined tax over the two years is reduced by over $6,000; if it is taxed in 2008, it is taxed in the hidden AMT phase-out bracket, while if it is taxed in 2007, it is only taxed at a the normal capital gain rate. The totals:
Be careful! If you are going to accelerate your income, and your taxes, you'd better be pretty confident you know what your income will for both 2007 and 2008. Talk to your tax advisor before you start throwing your income around among your tax years.
This is another in our daily series of 2007 year-end tax planning posts. Look for a new post daily through December 31.
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YEAR-END: MID-QUARTER?
December 23, 2007
One of the more obscure tax traps at year-end is the "mid-quarter convention." Normally the tax law computes depreciation on fixed assets as if they were placed in service in the middle of the year - the so-called "half-year convention."
When a company places more than 40% of its new assets in service in the last three months of the year, different rules apply. When that happens, depreciation for each asset starts at the midpoint of the quarter in which it is placed in service. This can have an unhappy effect on your deductions.
Example: Snow Co. has placed in service two assets during the year: a machine costing $600,000 that went into service July 31, and another machine costing $399,000 that was up and running October 15. Both assets have five-year tax depreciation lives. The depreciation for these two assets for the year would be $199,800, computed for 1/2 year under the tax law's 200% declining balance depreciation method.But then Snow decides to go online and buy a $1,001 computer, which is placed in service December 29. Suddenly more than 40% of the new assets for the year have been placed in service in the last three months of the year, and the mid-quarter convention applies. The depreciation for the $600,000 machine is computed starting in the middle of the third quarter and comes out to $90,000. The depreciation for the other $400,001 is computed for 1/8 of a year, as the assets are deemed to go into service at the midpoint of the fourth quarter; that deduction comes out to $20,000.05.
So, by adding a $1,001 asset at year-end, Snow Co. has reduced its depreciation deduction from $199,800 to $110,000. And five cents.
So if you are in a hurry to get assets in service before year-end, slow down and make sure that you don't end up reducing your depreciation by going into the mid-quarter convention.
Stop by daily through December 31 for another year-end tax planning post. Collect them all!
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CSI - NO, NOT THE TV SHOW
December 22, 2007
If you are an Iowan with college costs in your future, or even in your present, the College Savings Iowa Section 529 plan might be a good place to make a year-end tax planning move.
Section 529 plans allow you to put away money in an IRA-like account where the earnings are tax-free, and permanently tax exempt if used for college costs. There is no federal deduction for Section 529 contributions, but you can 2007 deduct contributions to College Savings Iowa on your Iowa 1040, up to $2,595 per donor, per donee. That means a married couple with two children can deduct up to $10,380 in CSI contributions. For a top-bracket Iowan, this works like a 6+% subsidy for making the investment.
You can contribute more than $2,595, but only that much is deductible.
If you have students in college already, you can contribute to the plan and use it to pay the tuition - in effect giving you a deduction for part of the annual tuition.
College Savings Iowa uses low-cost Vanguard "Life Cycle" funds, which helps keep your college savings from being eaten up by broker and mutual fund fees. CSI also has individual portfolios, if you want to try to outsmart the market.
To get your Iowa deduction, make sure you postmark your 2007 contribution by 12/31. You can enroll in CSI online here.
Remember, Section 529 plan gifts count towards the $12,000 annual gift tax exclusion, so keep that in mind if you want to maximize your use of annual gift tax exclustions.
This is another installment in our daily series of year-end planning posts.
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INDIVIDUAL RETIREMENT ACCOUNTS COME OUT IN THE WASH (SALE)
December 21, 2007
We mentioned the dangers of "wash sales" the other day. The wash sale rules disallow a loss on the sale of stock if you buy shares of the same stock within the thirty day periods before and after the day you sold the loss stock.
Yesterday the IRS said that the wash sale rules also disallow losses on stock when you buy identical replacement shares in an IRA (Rev. Rul. 2008-05).
This makes buying shares of your loser stock in the 61-day wash sale window a worse deal than buying them personally. If you do a wash sale in a personal account, the disallowed loss increases your basis in the purchased shares that triggered the wash sale rules, so you can get the loss eventually. If you trigger the wash sale rules by purchasing through an IRA, you never get the benefit of the loss.
So - you can still sell loss stock and deduct the losses against capital gains this year. But beware the wash sale rules - and don't try to get around them with your IRA.
Links:
TaxProf Blog
Tax Guide for Investors
This is part of our series of posts on 2007 year end tax planning - one a day through December 31!
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THE $12,000 CHRISTMAS PRESENT
December 20, 2007
The income tax isn't the only tax that deserves holiday season attention. You still have 11 days to make a dent in your estate tax. Don't assume that Congress will deal wisely and responsibly with the estate tax. If they do nothing, it will come roaring back in 2007 with a lower exemption and a higher rate.
Assuming you are fortunate enough to have such worries, there are some easy things you may still be able to do this year. The first tool you should reach for is the $12,000 per donor, per donee annual gift tax exclusion. This is available every year, but once the year is over, your chance to use that exemption is gone forever.
You might think that if you have a net worth high enough to worry about the estate tax - over $1 million, assuming current law and assuming you live to 2011 - the $12,000 exclusion is too small to worry about. You'd be wrong. Think about the math. Say you are a married couple with two children and four grandchidren. Assuming you like them, that means you can give away between the two of you 12 annual exclusion gifts each year, totalling $144,000. If you continue to like your descendants, you can push $1,440,000 out of your taxable estate over ten years $12,000 at a time, saving about half that in estate taxes on your death.
Remember, the checks have to clear by year-end, so if you are making your year-end gifts, don't wait much longer.
Visit the Tax Update each day through December 31 for the latest installment in our year-end tax planning series.
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WIN THE YEAR-END TAX GAME WITH LOSERS
December 19, 2007
This is the time of year when having clinkers in your stock portfolio isn't quite so painful. If you have capital gain for the year, you still have a few trading days to offset them by selling your loser stocks. Just remember a few simple rules:
-The loss has to be realized in a taxable account. Selling a loser in an IRA or 401(k) plan doesn't give you a deductible loss.
-Be sure the trades are executed no later than December 31. For long positions, the trade date controls.
-If you have a loss on a short sale, the settlement date has to be no later than December 31.
-You can't buy the same stock within either 30 days before the sale or 30 days afterwards. If you do, the "wash sale" rules disallow your loss.
Remember: capital losses are fully deductible to the extent of your capital gains. They can also offset up to $3,000 in ordinary income. Losses over that amount carry over to future years. So bid your losers a fitting farewell by selling them this year to help you out at tax time.
This is another in our series of daily tax ideas through December 31. Collect them all!
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YEAR-END GIVING: WHY APPRAISALS MATTER
December 18, 2007
Yesterday we mentioned the need to get "qualified appraisals" for charitable donations of property other than publicly-traded securities. The Tax Court issued a decision yesterday that illustrated our point.
The Smith family of Scottsdale, Arizona ran an employee benefits firm called Beneco. They transferred the firm to family partnerships they owned for estate planning purposes. They later donated part of their interests to a charity, claiming all together over $2 million in charitable contributions.
The taxpayers filed the required form 8283, Noncash Charitable Contribtuions, with their returns. And the trouble began.
First, they described the donated property as "FLP Beneco Stk," rather than the name of the actual partnership. They failed to attach the required appraisal summary reports to their tax returns. For some years the appraisals were prepared by their CPA tax preparer, who wasn't a "qualified appraiser." For other years, the appraisal information attached to the return fell short of the tax law's requirements.
The taxpayers said that they should still get their deductions on the grounds that they "substantially complied" with the tax law rules on contributions. The Tax Court held otherwise:
We hold that petitioners did not provide sufficient information and/or submit the documents required to have substantially complied and they are, therefore, not entitled to deductions for noncash charitable contributions of FLP interests, as determined by respondent. Petitioners, in each year under consideration, did not attach to their returns qualified summary appraisal reports as required by the statute and the regulations. In addition, it has not been shown that petitioners' C.P.A. was a qualified appraiser within the meaning of the regulatory requirements. Moreover, certain of the reports that were referenced on the returns were not shown to exist, and none of the purported reports or documentation submitted met the time requirements for their preparation and submission. The contributed property interests were not fully or adequately described so as to permit respondent to understand the valuation methodology, and the documentation submitted was terse and did not adequately explain the bases for the values claimed.
Bottom line? The loss of the entire deduction for all years before the Tax Court.
The Moral? If you are giving year-end gifts other than public securities, don't skimp on the appraisal. If you don't give the IRS the information they want, your deduction may disappear.
Additional tip: If you ARE making year-end gifts of publicly traded securities, get on it - sometimes charities and brokers get behind on their paperwork, and if it isn't done this year, your deduction will have to wait until 2008.
Cite: Smith, T.C. Memo 2007-368
Visit the Tax Update each day through December 31 for another 2007 year-end planning idea.
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IT'S BETTER TO GIVE THAN TO RECEIVE; TO DEDUCT IS BETTER STILL
December 17, 2007
It's the time of year for giving. If you are in the under-70 set, you can't make big charitable contributions out of your IRA. Taxwise, then, your best way to give is with appreciated long-term capital gain property. A gift of, say, appreciated stock to a public charity is deductible at full fair-market value, and you never have to pay tax on the appreciation.
Publicly-traded stock is the most convenient way to give appreciated property, as there is no requirement for an appraisal. If you donate other long-term capital gain property, you have to get a "qualified appraisal" on gifts of $5,000 or more. No appraisal, no deduction. And remember, the stock has to be long-term capital gain property, held for over one year; ordinary income property is normally only deductible at cost (or value, if less).
Other year-end planning links:
Gina on 2007 IRA contributions
Kay Bell's year-end series, installments three, four and five.
This is another installment of our series on 2007 year-end planning. Check pack each day for another post through December 31!
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SHOULD YOU PREPAY YOUR STATE AND LOCAL TAXES?
December 16, 2007
Paying your state and local taxes early is one of the oldest tricks in the year-end tax planning book. If you are going to owe the state in April, you might as well take the deduction now, right?
Maybe.
While prepaying taxes might seem like a simple "yes or no" question, it's not necessarily so. You need to consider several factors:
Are you going to be itemizing deductions for 2007? If not, then there's no point in paying early.
Are you going to be paying alternative minimum tax for 2007? The itemized deduction for state and local taxes doesn't apply in computing AMT, so you might be wasting your time getting your taxes paid early - and if you won't be in AMT in 2008, you might be squandering a deduction if you do pay early.
Is it worth giving up the interest the payment would earn to get that deduction in April? The chart below shows whether prepaying makes sense for a taxpayer who is not in AMT for either 2007 or 2008, at different tax brackets, and who won't have penalties for underpayment of estimated tax whether or not taxes are prepaid. The dates shown are typical deadlines for state and local tax payments (detail below the fold). It shows that it always makes sense for a non-AMT taxpayer to prepay a 4th quarter state payment, but only high-bracket taxpayers benefit from prepaying you state taxes due next April.
But this chart only works if you meet all of the simplifying assumptions. If you are basing your estimated taxes on your actual 2007 income, rather than, say, your 2006 taxes, a state tax payment now might wipe out a federal tax underpayment penalty due from the first, second and third quarters - which obviously changes the math. And if you are in a low bracket this year, but next year you have a windfall coming, it's likely the deduction will be worth more to you next year. And vice-versa.
In any case, you need to start by running the numbers.
This is another of a daily series of 2007 year-end tax planning posts running through December 31. Add to your collection!
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DON'T BUY SOMEONE ELSE'S TAX BILL
December 15, 2007
It's not a good idea to spend your hard-earned money for the privilege of paying taxes on someone else's earnings. That means you should be careful if you buy mutual funds in December.
The tax law requires mutual funds to distribute capital gains on their stock sales annually, and most distribute the whole amount in December. If you buy into a mutual fund the day before the distribution, you buy a share of the whole year's liability.
Many funds put the amounts and dates of expected capital gain distributions on their web site. It's worth a few minutes on the web to avoid buying a year's worth of mutual fund tax liability.
There is another handy way to avoid capital gain distributions: stick with index funds. These funds only trade to track changes in the components of their indexes, so they have very small capital gain distributions. If you visit the Vanguard Funds 2007 capital gain distribution list, you will find only one index fund with a capital gain distribtion - and only for a penny per share. Contrast that with the actively-traded funds, with taxable distributions as high as $8.37 per share.
For more on fund distributions, here is a good Kiplinger article. For more on index fund investing in general, go here or here.
This is another installment of our series of 2007 year-end planning ideas. Don't miss a one!
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IS THIS THE YEAR TO SPEND YOUR IRA ON CHARITY?
December 14, 2007
A key tax break for charitable-minded taxpayers is scheduled to expire at the end of this year. If you are over age 70 1/2, you are eligible to transfer up to $100,000 from your IRA directly to charity.
Such a transfer is better than taking the money from the IRA and writing a check to charity because the funds don't run through your tax return. Your AGI isn't increased, so you don't lose itemized deductions; also, the contribution isn't affected by the tax law's limit of charitable deductions to 50% of AGI.
For taxpayers with enough net worth to be tsubject to the estate tax, giving away IRAs to charity has two benefits: it avoids estate tax on the donated funds, and it avoids income tax to the beneficiaries.
If you want to make this donation by year-end, you should act right away; the IRA custodians need some time for their paperwork.
This is part of our daily series of posts on 2007 year end tax planning that will appear through December 31. Collect them all!
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YEAR-END PLANNING: HURRY UP AND ADD FIXED ASSETS?
December 13, 2007
The tax law has always required taxpayers to expense long-lived assets over multiple years through depreciation deductions. These rules have had an important exception, Section 179, which lets you expense in the current year assets that would otherwise need to be depreciated. Congress has expanded the size and scope of Section 179 in recent years, making at a potential year-end planning too.
Taxpayers are allowed to deduct up to $125,000 in business assets that would otherwise have to be depreciated or amortized. If you have a need for such assets, that means you can knock up to $125,000 off your 2007 business income by getting the assets this year.
Before you start writing checks, though, keep in mind some important limitations:
- The assets have to be "placed in service" before the end of the year to qualify; just writing a check for an asset to be delivered next year doesn't work.
- Assets used in a real property rental business don't qualify.
- The deduction phases out dollar-for-dollar as qualifying assets purchased during the year exceed $500,000.
- You have to have "active" taxable income to use the deduction. This sometimes trips up retired taxpayers who are passive investors in a pass-through entity -- a partnership or S corporation -- , as they may not have enough "active" income to use the deduction.
- The $125,000 limit applies per taxpayer. That means a pass-through entity with many owners needs to be sure it doesn't pass-through Section 179 deductions that its owners can't use.
Even with these limits, there are many taxpayers who will find the Section 179 deduction very handy between now and December 31. Just ask any SUV dealer.
Visit taxupdateblog.com every day through December 31 for a new year-end planning idea. Collect them all!
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IS A QUALIFIED PLAN A GOOD MOVE BY YEAR-END?
December 12, 2007
Most year-end tax planning moves require you to write a check before the end of the year to get a deduction. For business owners, there is one year-end tax planning move that doesn't need to be funded until as late as next fall: a qualified retirement plan contribution.
A qualified plan can be especially attractive to a self-employed businessman. If you are the only plan participant, a contribution to your plan gives you a tax deduction for taking money from one pocket and putting it in another. With a "solo 401(k)" plan, you can contribute the first $15,500 of your pre-tax business income to the plan - or up to $20,500 if you are age 50 by December 31 (but not if you have another 401(k) plan from another job). You might even be able to put in more than that, to a maximum of $45,000; you can make a profit sharing contribution to the extent it, when added to your 401(k) contribution, doesn't exceed 25% of your pre-tax income.
There is a catch. While you don't have to fund a 2007 plan contribution until the due date of your tax return - including extensions - you have to have the plan in place by the end of your tax year. If you want to put a plan in place by the end of this year, you need to move quickly.
Link: Kiplinger: SEP vs. Solo 401(k)
This is the third in a daily series of year-end planning ideas that will run through December 31. Collect them all!
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GOT BUSINESS LOSSES? GET BASIS
December 11, 2007
The dark cloud of business losses can have a silver lining of tax refunds. If you own a money-losing S corporation, you might even be able to eliminate all of your tax for this year and get back taxes from earlier years.
But only if you have basis.
S corporation stock basis starts with your investment in S corporation stock. It increases with income and capital contributions, and it goes down with losses and distributions.
If you have no remaining basis in your S corporation stock, you can deduct losses to the extent of your basis in loans you have made to your S corporation. As with stock, this basis goes down if you take losses; any income restores debt basis before it restores stock basis.
Your basis for taking losses is determined at the end of the year, so you still have time to add to your basis for a calendar-year S corporation. While many taxpayers like to add to their basis by making cash advances, recently-proposed regulations make this a potential trap. Better to make a contribution to corporate capital, unless the business is in such dire financial shape that bankruptcy creditor status is crucial (and if that's the case, maybe you shouldn't throw good money after bad).
And no, a loan guarantee doesn't get you S corporation basis; you need to go "back-to-back," borrowing the money yourself and loaning (or contributing) it to the corporation.
If you have to borrow the money to add to your S corporation basis, be careful. If you borrow it from a "related party," the tax law might say you aren't "at-risk" for the borrowing, making your new basis useless for taking losses.
Finally, remember that you need to get past the "passive loss" rules to deduct S corporation losses.
This is part of a series on 2007 year-end tax planning. Check every day for a new one!
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IT'S DECEMBER. DO YOU KNOW WHERE YOUR TAXABLE INCOME IS?
December 10, 2007
Most of us have three weeks left in our taxable year. It's asking a lot of three weeks to cure the tax sins of the other 49, but there still may be time to pull it off.
The place to start is to figure out what your taxable income will be if you don't do anything else. Unless you know where you stand, you are like a traveler without a map, a compass, or even a destination.
Here are some steps to help you get there:
Get out your 2006 1040. Look it over line-by-line, and see what items are likely to change. Did you have a big capital gain? Did you sell a business? Did something happen in 2006 that won't happen again?
Look at your last paycheck. Add in any more checks this year, and any year-end bonuses you might have. This will give you your expected 2007 salary, withholding, 401(k) contributions, and any other deductible take-outs from your paycheck.
Get out your last brokerage statement and look at where you stand for capital gains for the year. It should also have your dividends and interest, and if you have any, your investment interest.
Look at your mutual fund statements to see where they stand for the year. You should also go online and see what they plan on doing for year-end capital gain distributions.
Do you have any retirement plan payouts going? Any other income items? If you are a business owner, where does that income stand?
Then think over your deduction side. DId you have an unusual losses? Did you contribute to an individual retirement account? A health savings account? Did you refinance your mortgage or buy a new house? Did you do something big for charity?
Once you have this information, you can see what your taxes look like so far. Then it's time to see what you can do about it.
This is the first installment of a daily series on 2007 year-end tax planning that will run through December 31. Don't miss a one!
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The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not neccesarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
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