Archive for the ‘2008 Year-end tax planning’ Category

Charge those deductions!

Wednesday, December 31st, 2008 by Joe Kristan

Today is the last day for most 2008 tax deductions. If you use your credit card to pay for a deductible expense today, you can deduct it in 2008 even though you won’t pay the credit card bill until 2009.
If you are charitably inclined, some excellent places to take your credit cards include:
Salvation Army
Soldiers Angels
Sertoma Foundation
Iowa Donor Network
Tax Foundation
Scan through all of our 2008 year-end planning posts to get other deduction ideas. The Tax Grrrl has year-end roundups for businesses and individuals, and Kay Bell also has some last-minute tax planning ideas. Even the IRS has a year-end deduction roundup. So get your deductions in order, and we’ll see you in 2009.


Take your (capital loss) medicine!

Tuesday, December 30th, 2008 by Joe Kristan

20081230-1.JPGIf there is a silver lining to this year’s cloudy stock market, it’s that capital gains taxes will be optional for many of us this year. How can a capital gain tax be optional? You are likely to have capital losses available in your portfolio that you can use to offset your gains. Now’s not the time to be proud. Take your medicine by selling enough losers to offset your taxable capital gains, if you can.
Ah, you ask, but why would I have capital gains this year?
First, the market didn’t tank until well into the year. It’s entirely possible that you sold stock at a gain before everything went south.
If you own mutual fund shares, it’s likely that they had to liquidate old positions to redeem panicky owners, incurring capital gains on ancient positions that they had to distribute to you. Your mutual fund company website probably can tell you how much that will be for 2008.
Maybe you sold a business, or some other non-traded asset.
So how do you take your losses? If you own publicly-traded securities, and they’re not from short sales (not bloody likely this year), all you have to do is sell them today or tomorrow; the tax law considers the trade date to be the date of the sale, even if the settlement occurs in 2009.
Mind the “Wash Sale” rules. If you bought other shares of the stocks you are selling today or tomorrow in the 30 days preceding the sale, or if you buy back the stock in the 30 days after the sale, your loss is disallowed – even if the purchases are in an IRA.
Remember, you only get to deduct losses in a taxable account. Sales in an IRA or a 401(k) don’t offset capital gains on your 1040. And you can only deduct capital losses to the extent of your capital gains, plus $3,000, so you don’t need to overdo it. If you do take more losses than you need, capital losses carry over indefinitely until you use them all at the rate of $3,000 per year, or until you incur enough capital gains to absorb them.
Tune in tomorrow for the final installment of our 2008 year-end tax planning series.
Flickr image from Aussiegall


Sometimes the check really is in the mail

Monday, December 29th, 2008 by Joe Kristan

You have three days left to get a letter postmarked in 2008. That means that if you are a cash-basis taxpayer, like most walking, talking humans, you have three days to write a check for a deductible 2008 expense.
For purposes of timing an income tax deduction, having a check in the mail is usually good enough for cash-basis taxpayers You can still write a check to charity and deduct it on your 2008 return if it is postmarked no later than Wednesday this week. The same goes for a deductible mortgage interest payment, a property tax payment, or any other deductible personal or cash-basis business expense.
It wouldn’t be the tax law without exceptions. The expense needs to be deductible in the first place, for starters. If it is to a related party, it won’t be deductible in 2008 unless the related party picks it up in income this year. And many expenses that are technically deductible, like real estate taxes and income taxes, do no good for taxpayers subject to alternative minimum tax.
Also, while “the check in the mail” may be good enough to claim a deduction, it isn’t good enough to achieve a completed gift for gift tax purposes. If you want to claim the $12,000 annual gift tax exclusion for 2008, the donee needs to cash the check no later than Wednesday at 11:59:59 p.m.
If you are writing a check for an amount that’s large enough to worry about, you should spring for a certified mail postmark so you can prove timely mailing to the IRS.
To review our 2008 year-end planning posts, click here.


Don’t stop giving now!

Friday, December 26th, 2008 by Joe Kristan

December 26 might not be the best time to say this, but it may be a good idea for you to do some more giving.
This may seem like an odd statement. After all, estates valued up to $3.5 million will be exempt from estate tax in 2009. You may have heard that the Obama administration will propose continuing this exemption amount indefinitely. If a couple can die with $7 million tax-free, why give away anything now? Unless, of course, you are worth that much.
For starters, the current tax law provides that the estate tax goes away in 2010, only to return in 2011 with a $1 million exemption and a top rate of 50%. A lot more folks are worth $1 million than $7 million, and with inflation there will be many more. There’s no guarantee that the new Congress and the new President will be any more successful than the last bunch; they’ve been unable to resolve the issue in 7 years of wrangling.
Also, given the current bailout fever, there will likely be tremendous pressure to raise tax revenues. Rich dead people only vote in a few major cities, so they are an easy target for tax hikes.
You can gift up to $12,000 per donor, per donee, each year without eating away at your $1 million lifetime gift exemption (yes, the gift tax exemption is much lower than the estate tax exemption). That means a couple with two kids and four grandkids can reduce their ultimate estate with $144,000 of gifts each year. Do that every years for 10 years and you’ve effectively increased your lifetime estate tax exemption by just shy of $1.5 million. But once you let an annual exclusion lapse, it’s gone forever. Sure, you can do annual gifting in 2009 (at an increased $13,000 annual exclusion amount), but you can do that anyway; the 2008 opportunity never returns.
With your portfolio likely somewhat smaller than it might be, you can give away stocks and other assets at values unthinkable only last year, squeezing a lot more shares into the same $12,000 annual gift. So maybe you shouldn’t stop giving just yet.


College Savings Iowa: a 529 with an Iowa tax bonus

Tuesday, December 23rd, 2008 by Joe Kristan

20081223-2.gifSection 529 plans allow you to invest for future education expenses in an IRA-like account. The income accumulates tax-free, and it can be withdrawn tax-free for qualified education expenses.
Iowa’s state sponsored Section 529 plan, College Savings Iowa, provides an addtional benefit to Iowa taxpayers: a deduction on your Iowa return for up to $2,685 per donor, per donee. That means parents with two children can deduct $10,740 in 2008 contributions (though additional non-deductible contributions are allowed). For a top-bracket Iowa taxpayer, this is like a 6% negative load on your investment.
Some other states also provide deductions for investments in their plan; you can look up your state at the College Savings Plan Network site. There is no Section 529 deduction on the federal return. Section 529 plan contributions do count against your annual $12,000 gift tax exclusion.
If you want a 2008 CSI deduction, you need to pay in by December 31.
Link: College Savings Iowa Enrollment information.


Year-end property donations: worth the trouble?

Monday, December 22nd, 2008 by Joe Kristan

Congress has been taking a lot of the zip out of donations of property to charity in recent years. Even so, a property donation can still be the most tax-efficient way to fulfill a charitable pledge before year-end.
When you donate appreciated long-term capital gain property to charity, you get to deduct the entire fair value of the donation without ever including the gain in income. That works out better than selling the property for a gain, paying the tax, and donating the remaining cash.
Aside from the obvious problem here — who has capital gain property right now anyway? — Congress has made it more difficult over the years to claim deductions for property gifts.
First they trimmed back the fun of used car donations. Unless the charity uses the car in its operations, you only get to deduct the amount the charity gets for the car when it sells it.
Then they shut down the big-game safari loopholeyou don’t get a fair market value deduction for stuffed game animals anymore.
Finally, they cut back the deduction for any donations of tangible personal property that the charity won’t be using for its tax-exempt purpose; such gifts can only be deducted at their cost basis. For example, if you donate a painting to a museum for their collection, you get a fair market value deduction. If you donate it for them to sell, you can only deduct your cost. This restriction doesn’t apply to marketable securities or real estate.
Unless you are donating marketable securities, the tax law requires you to get a qualified appraisal from a qualified appraiser to take any deduction – whether at cost or fair market value – if the claimed value exceeds $5,000. The appraiser will have to sign a Form 8283 that will be attached to the donor’s tax return. No appraisal, no deduction.
What does this all mean?
– If you want to make a property donation, it’s easiest to use marketable securities.
– If you are donating other property, and you plan to take a deduction over $5,000, get the appraisal done first; if you’ve already made the donation, arrange the appraisal now.
– If you are donating something like artwork, make sure the donee won’t be selling it within three years if you plan to claim a fair-market value donation.
Check back every business day through 12/31 for another year-end tax planning post.


Forbes: there will be no 2008 required minimum distribution waiver

Friday, December 19th, 2008 by Joe Kristan

Forbes reports that there will be no waiver for 2008 of the rules requiring minimum distributions from IRAs and retirement plans (via Kay Bell). There have been calls to waive the 2008 RMD requirement because of the stock market decline during the year; the distribution is based on account values at the end of 2007, and is mandatory for taxpayers who reach age 70 1/2 by the end of 2008. Forbes bases its report on a letter from the Treasury to Congresscritters who have called for a 2008 waiver.
This means if you haven’t taken your distribution yet, you need to get it done. The tax law imposes a 50% excise tax on RMD shortfalls. If you just turned 70 1/2 this year, you have until April 1 to take the distribution; older taxpayers have to take it by December 31.
Congress has waived the RMD rules for 2009, but the waiver does not apply to the distributions that can be taken by April 1 for taxpayers reaching age 70 1/2 this year.
Required distribution relief: thanks for not much.
Remember to take your 2008 required minimum distribution from your IRA


You can’t restore S corporation loan basis with a capital contribution

Thursday, December 18th, 2008 by Joe Kristan

S corporation shareholders can only deduct losses if they have basis in either:
-Their stock, or
-Loans they have made (not guaranteed!) to the S corporation.
A big part of year-end planning for S corporation shareholders is making sure they have some basis. When you have multiple shareholders, loans are often preferred because each shareholder can choose whether or not to make the loan without disrupting the ownership percentages.
The danger with loans is that the losses reduce the shareholder-lender’s basis in the loan; if it is repaid before enough S corporation income is earned to restore the loan’s basis, the lender has a taxable gain. This is especially a problem under the new regulations that restrict “open account” S corporation loans. This problem snared S corporation owners with income on $1,622,050 in loan payments yesterday in Tax Court.
The Taxpayers, brothers Sheldon and Ira Nathan, loaned the funds to their S corporations, enabling them to deduct losses. In a series of transactions, they made capital contributions of over $1.4 million to the corporations and repaid the loans. The IRS said they had ordinary income on the loan repayment. The taxpayers tried to convince the court to allow them to increase the loan basis by treating the capital contributions as income, but the judge didn’t go for it (my emphasis; copious citations omitted):

By attempting to treat petitioners’ capital contributions to G&D and W&N CAL as income to G&D and W&N CAL, petitioners in effect seek to undermine three cardinal and longstanding principles of the tax law: First, that a shareholder’s contributions to the capital of a corporation increase the basis of the shareholder’s stock in the corporation; second, that equity (i.e., a shareholder’s contribution to the capital of a corporation) and debt (i.e., a shareholder’s loan to the corporation) are distinguishable and are treated differently by both the Code and the courts; and third, that contributions to the capital of a corporation do not constitute income to the corporation.

As you go about S corporation year-end planning, a few things to keep in mind:
– If you are looking at a loss, determine whether you have enough basis to deduct it. You need to take into account any current year loans and distributions to date.
– If you are considering year-end loans or contributions to capital, remember that basis is necessary to deduct losses, but it isn’t sufficient; your basis has to be “at-risk” and you have to clear the maze of the “passive loss” rules.
– If you make a year-end loan to the S corporation to take losses, remember that the loan needs to stay in place until S corporation income has restored your loan basis; otherwise you will trigger income when you repay the loan.
– If you have repaid a loan already and now are facing taxable income as a result, don’t count on restoring your basis with another loan or a capital contribution.
– Be extremely careful in using funds from another wholly-owned entity to finance a loan to the S corporation; if you circle the funds back to where they started, the IRS may strike down the loan as lacking substance.
Cite: Nathel, 131 T.C. No. 17.
Link: Tax Update 2008 year-end tax planning posts.


Deferred Comp and year-end

Wednesday, December 17th, 2008 by Joe Kristan

The Section 409A rules may be the worst single piece of tax legislation passed in the Bush era. A response to the WorldCom and Enron scandals, it imposes extremely complex rules with ridiculously high penalties on every employer. Even the NFL:

NFL agents were sent an urgent memo this week from the NFLPA, requiring immediate attention to


When can I deduct a business expense?

Tuesday, December 16th, 2008 by Joe Kristan

Today at we cover the pressing issue, “When do I get to deduct the expense?” The post covers the timing of business expense deductions for business taxpayers:

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.

Of course, it’s more complicated than that, so go there and check it out.