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I help clients sort through the avalanche of numbers, details and conflicting advice they face, to make sense of what they have - so they can face the future with clarity and confidence.
Call 978-635-9687 or email me (Kathy@NashobaFinancialPlanning.com) today to talk about which of our services might be right for you. Preview the Confidential Questionnaire on our website by clicking on "Client Forms". Visit our website . . .
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 After December 31 your ability to reduce your income tax bill for 2007 is pretty limited.
However, there are things that you can do this month that could reduce that bill. There is a lot of information in this newsletter, so I've tried to break it into sections to make it easy for you to click on the things you are really interested in.
I feel like the Grinch writing to you about taxes during December, but if you are like me you may have put off some things until the end of the year. So, "Surprise!"-- the end of the year is only about a week away!
Happy Holidays to You All!
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AMT Will Get Fixed, But When?
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There has been quite a battle going on in Congress over this tax. AMT stands for Alternative Minimum Tax and requires a separate, complicated tax calculation. When it was put in place decades ago it affected very few tax payers. This year, if not fixed, it will affect 20 million tax payers nationwide, especially in states like Massachusetts where we have high state and local taxes. The average additional tax is about $2000.
On December 18th Democrats in the House of Representatives indicated that they were likely to vote on a stripped down version of the patch legislation, even though it violates "paygo" rules. Paygo rules require a corresponding tax increase for every tax cut. To learn more about what happens, go here.
On behalf of our tax preparation retainer clients, we'll keep an eye on this and other tax law changes and we'll make sure that we have what we need from the IRS when you come in for your tax appointment.
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End of Year Tax Tips for Investors
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 Kiddie tax--if you have money in your child's name for college expenses, and if they are 18 years old, they can avoid the kiddie tax (where some of their income gets taxed at your higher rate) by taking gains this year. So, if selling now makes sense you can save on taxes too. Just be sure to consider all the implications of selling now, including possible financial aid impact. Kiddie tax laws have changed quite a bit in the past two years. Read more here.
Harvest losses to offset gains--your capital losses can be used to offset your capital gains. If you have an investment showing a loss, AND you would consider selling it anyway, sell and use the loss. Up to $3000 of the loss can be offset against ordinary income. Any loss over the $3000 can be carried over to future years.
Avoid end of year purchases of mutual funds--if you buy late in the year, you could get the tax on the capital gains without the full year of gain. Incidentally, capital gains distributions from mutual funds are expected to be significantly higher this year than the last few years because the stock market has done so well.
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Give to Charity--Save On Taxes
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You can donate cash or goods to charity and reduce your tax bill. There are some new rules and good practices to be aware of:
- As of August 17, 2006 claiming cash contributions requires a receipt, cancelled check or credit card statement. Take that checkbook with you!
- Contributions of goods such as used clothing face higher scrutiny. Prepare yourself and you have nothing to worry about. Photograph the items you donate--spread them out on the floor and take some pictures. Your records must reflect that they were in good or better condition. Finally, get a dated receipt from the charity. They don't itemize and value it, that is up to you. Charities need good used clothing, especially warm things at this time of year. And you deserve the tax break.
- Use "thrift store value" as the value of your contribution. The Salvation Army website has data you can use, or use the book Deduct It! Deduct It!, reviewed below.
- Donate some or all of your Required Minimum Distribution from your retirement accounts to your favorite charity and avoid tax on the income. For some taxpayers this will make sense. You will lose the charitable deduction for the gift but it keeps your adjusted gross income lower.
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Stock Options--Worse than a lump of coal?
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Those wonderful employer stock options! They can provide lots of cash but also lots of taxes. Handled wrong, just lots of taxes, and no cash. That's worse than a lump of coal in your stocking.
- If you exercise and hold ISOs in 2006 you will owe AMT tax on the so-called bargain element. If the stock then falls in price, you have to pay the tax and you won't have the stock value to pay for it. If you do a simultaneous exercise and sale of ISOs, you may eliminate the AMT, but you may now owe ordinary income taxes. Most employers do not withhold taxes here, so at the least you could owe more tax in April than you expected, and you could be subject to an under-withholding penalty.
- Non qualified stock options--with this type of option, employers may withhold taxes when you exercise and sell, but they may not withhold enough, particularly if this income pushes you into one of the higher tax brackets. Again, you could owe an under-withholding penalty.
So review your options carefully. The time to figure out the tax implications of exercising employer stock options is before you do it - not the following April! This is one reason we do tax planning for our clients all year long.
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Reduce Your 2008 Taxes by Putting More in Your Retirement Plan
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It's probably too late this year to increase your 401k or 403b contributions for 2007, but get next year started off on the right foot. Contribute at least 10% of your earned income to a retirement plan - and "max out" as soon as you can. The maximum 401k/403b contribution will remain at $15,500 in 2008. If you are at least 50 in 2008 you can contribute another $5000.
- If you aren't already at 10%, increase your contribution by at least 1% in 2008.
- If you're already at 10%, but not maxing out, increase your contribution by at least 1% in 2008.
- Put this on your calendar so that you make the change early in January.
Contributing to a retirement plan is the best way most of have to not only save for retirement, but reduce our tax bill. If you're in the 25% tax bracket and contribute $10,000 to your 401k/403b, you will reduce your federal income tax bill by $2500!
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College Finances--Apply for FAFSA Pin
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Just a quick reminder--apply now for your FAFSA pin at their website http://www.fafsa.ed.gov/ to speed your financial aid application process. You will need two PINs - one for the student and one for the parent(s). Keep these PINs in a safe place, as you will use them throughout your child's college education.
Submit your FAFSA and PROFILE (if needed) as soon as possible in January. You don't need to complete your 2007 tax returns in order to do this, but you do need a pretty good handle on what they'll look like. Creating preliminary tax returns and helping with the FAFSA and PROFILE are two more services we offer our open retainer clients.
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The Book Nook
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Deduct It! 2007 Edition by Bert Whitehead
 Bert Whitehead, founder of the Alliance of Cambridge Advisors*, really had a parrot named Ernie, and he trained Ernie to say "Deduct It! Deduct It!" for his clients. Many people shortchange themselves on charitable deductions, because they didn't keep records or because they underestimate the value of their donations.
This book gives you the tax advice, thrift store values, and forms to use for tracking your charitable contributions. For those of you who like to use hardcopy this is a great resource.
You can order it from Bert's website for $9.95 plus shipping and handling or see his other books here.
*Yes, I'm a member of the Alliance of Cambridge Advisors, a nation-wide network of fee-only financial advisors who practice holistic, tax-aware, life-integrated financial planning that helps individuals and families transform their
lives. Learn more about us here.
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