Tax Planning . . . ALERT

The information contained in this ALERT is not intended to constitute legal, or financial advice.  Decisions with regard to these matters should only be made after consultation with a competent professional.

One of the areas in which many people do not plan properly is taxes.   When it is time to file the Form 1040 on April 15, too many people are groaning about their tax bill and wishing they had taken some steps to ease their tax burden.  Well, the time to do tax planning is always.  In my most well known seminar (to the extent that any are well known!), “The 5 Biggest Mistakes People Make with Their Money,” mistake Number Two is the failure to understand the impact of taxes on transactions.   So, simply stated, people should be thinking about their taxes, and planning for them, all the time. 

So, let’s put this mantra into practice.  Yes, 2008 may only be a little more than half over, but you should be thinking about the following . . . and more . . . now . . .

1.  For 2008, there is a 0% long-term capital gains bracket available for some taxpayers.  Yes, long-term capital gains tax-free.  It is available to taxpayers in the 10% and 15% regular income tax brackets and applies to capital gains and qualified dividends in 2008.  On a joint return, the maximum taxable income allowable to get this benefit is $65,100, and on an individual return, the maximum taxable income allowable is $32,550.  Don’t get confused, as these numbers are taxable income -- not gross income.  Taxable income appears midway down the second page of Form 1040, after deductions and personal exemptions have been subtracted from adjusted gross income.  So, you may qualify for this special tax break even if your total income is well above these numbers.  Do the math!

2.  Many individuals do not take advantage of their ability to make tax-free gifts.  First of all, anything that is gifted out of your estate decreases your estate’s size, thereby minimizing the effect of the federal estate tax, or similar state tax to which your estate might be exposed.  If what is gifted is income producing, by shifting it to a family member in a lower tax bracket, you will be improving the family’s overall income tax experience.  However, if your planned shift is to your child, be mindful of the so-called kiddie tax rules.  IRS Publication 553, Highlights of 2007 Tax Changes will answer all your questions.  Visit www.irs.gov, and click on Forms and Publications.

Most people understand the gift tax limitation of $12,000 per donee per year, $24,000 if the taxpayer’s spouse joins in the gift.  Gifts above that amount (not directly payable to an educational institution or medical care provider) trigger gift taxes that are the responsibility of the donor to account for and to pay.  What most people do not understand is that every person has a lifetime gift tax exemption of $1,000,000, and if a taxable gift is made (one exceeding the $12,000/$24,000 limitation), the gift tax simply operates to decrease the amount of the lifetime exemption.  No out-of-pocket gift taxes must be paid until the entire $1,000,000 exemption is exhausted.  Furthermore, if your estate is too small to incur federal estate taxes ($2,000,000 in 2008), the gift taxes actually cost nothing.  But even if your estate incurs federal estate taxes, gifts can save on estate taxes by removing the future appreciation of the gift from your estate.

3.  A primary focus of my professional practice is in the area of charitable giving.  Many people, most actually, make charitable gifts in cash when they could establish a more favorable tax and charitable result by using appreciated property or life insurance to make gifts.  If one has publicly traded stock in which the basis (tax cost) is low and gives the stock to a charity, a host of good results ensues.  First of all, a current income tax deduction is generated for the full fair market value of the stock, so all the unrealized capital gains taxes are avoided.  And, as mentioned, the value of the stock, as well as any future appreciation, is out of your estate so you will never owe estate taxes on it.  If one uses life insurance to make charitable gifts, the charity gets an enhanced death benefit in the future, while every year’s premium is a full income tax deduction for the donor/insured if the charity owns the insurance policy.  Of course, the death benefit proceeds ultimately collected by the charity are also income tax free.

4.  Watch the tax implications based upon the state in which you live.  Even among the people who do some tax planning, few give much thought to state taxes.  I recently sent out an ALERT addressing over assessments in real estate taxes, so be vigilant that your assessments and local property tax records are accurate.  If you missed that ALERT, just let me know and I’ll get a copy to your in-box without delay.  States with income taxes create many special rules, exemptions and conditions on taxation, so make sure you review your situation with a qualified professional who is knowledgeable about what you face in your state.   Lastly, if you are planning on moving to another state, check the tax implications and opportunities of the move now.  For example, if your current state does not have an income tax but you are moving to a state that does have such a tax, it may make sense to sell securities, or complete other transactions, before you move.

Just do some planning!

The hiring of a lawyer is an important decision that should not be based solely upon advertising. Please visit the Doherty Professional Association at www.dohertypa.com today to learn about Mr. Doherty’s credentials and how he might assist you in estate and financial matters.