Tax Planning for 2008

Thought tax time was over? Think again. Tax planning is an ongoing process. Each year you need to take a fresh look at your situation in light of new limits and laws. A few small changes each year can add up to thousands of dollars saved come April 15, 2009.

Below are four tips you may be able to put in place this year.

Bundle Fees… and Save
Accounting, investment management and estate planning fees are deductible as a miscellaneous itemized deduction to the extent they exceed 2% of your adjusted gross income. Paying year by year, you may never exceed the 2% limit.

By bundling fees (paying two years at once) a portion of these expenses may become deductible for you. At the end of the year, check with your tax planner to see if this strategy will work. If so, prepay 2009 fees at the end of 2009.

Rearrange Investments = Reduced Taxes
You may be able to lower your tax bill by simply rearranging your investments.

To use this strategy place investments that generate taxable interest income, like bonds or CDs, into your tax deferred accounts such as 401(k)s, ROTH or Traditional IRAs.

Take investments that generate long term capital gains and dividend income (currently taxed at a lower rate than interest income) and place them inside of your non-retirement accounts.

For example, if you own $50,000 of bonds that generate $2,500 of interest income, at a 25% rate you will owe $625 of taxes on that interest. If that same investment is owned inside of a retirement account, no taxable income occurs until you actually take a withdrawal.

Happy 50th Birthday
Are you turning 50 this year? If so, congratulations! You are now eligible to make a “catch up” contribution each year to your retirement accounts.

For 2008 you may put an extra $5,000 into your 401(k) plan (in addition to the $15,500 salary deferral limit) for a total of $20,500 in contributions.

The “catch up” amount allowed for a ROTH or Traditional IRA is an extra $1,000 (in addition to the $5,000 regular contribution) for a total of $6,000 in contributions and for a SIMPLE IRA an extra $2,500 (in addition to the $10,500 salary deferral limit) for a total of $13,000 in contributions.

Take advantage of that birthday and be sure to make your catch up contributions.

Borrow Smart
Borrowing money? Remember investment interest is a deductible expense against any investment income you may have. This means, depending on the rates, it may make sense to borrow against investment accounts to fund major purchases.

Before borrowing on revolving credit be sure to check with your brokerage firm to see what margin rate or collateralized line of credit rate they are offering.

If you have trouble keeping track of all of this on your own, remember that a good CPA or financial planner(CFP®) will review these types of strategies with you each year and bring relevant items to your attention.

Contributed by Dana M. Anspach, CFP®, Principal of Wealth Management Solutions, LLC. For more information visit www.wmsus.com. Dana has also written an e-book on the topic of retirement income, available at www.sensiblemoney.com.