Many more of you find yourselves in this predicament. What can you do? Who can you call? Well, those dashingly handsome financial super heroes are here to serve. If you are using un-reimbursed employee business expenses on your itemized deduction schedule, get reimbursed. These expenses will cause the alternative minimum tax (amt) to rear its evil head. If you use your car for business, get your boss to reimburse you for these expenses as opposed to getting a bonus or commission payment. This will keep income out of your W-2 and helps to circumvent amt. This is good for employees and employers as the reimbursement of expenses follows the "accountable plan rules" issued by Internal Revenue. Following this simple technique will save everyone money. List your employee business expenses, including mileage at 50.5 cent for the first half of 2008, and 58.5 cents for the second half, and get your employer to reimburse in lieu of a paycheck. You get the money tax free, and your employer avoids payroll tax. Keep in mind that your employer might not want to reimburse for meals and entertainment as they are a limited to being 50% deductible for income tax purposes.
Real estate taxes and state income tax deducted on your "schedule A" will also help to create an amt situation. Consider making any state estimated payments in January as opposed to making them in December. In addition, you might also be able to pay part of your real estate taxes in January.
If you are typically deep in the alternative minimum tax, you might just have to embrace the concept. The marginal brackets are 26% and 28% respectively for amt which means you are not deep into the 35% regular bracket. In fact, it might make sense to accelerate income into 2008 to maximize the amt brackets. Remember, there's a new administration in town in 2009 and all bets are off.
To Roth, Or Not To Roth
With the stock market down as much as it is, there might be opportunity for converting a traditional IRA to a Roth. This can only be done if adjusted gross income is $100,000 or less (not including the conversion of the IRA). Converting a traditional IRA to a Roth is a taxable event in the year of conversion. Because many IRA balances are down in value, this might be the time to make the conversion and minimize exposure to income tax. The idea in doing this is to pay tax now (or not at all if your income from other sources is significantly reduced) to avoid paying it at retirement age. This could be an important estate planning tool. Think about this carefully.
Buying a Home
If you are a first time homebuyer, it might make sense to arrange settlement to occur in 2009. Why is this you ask? There might be points (remember, seller paid points are also deductible by the buyer) or real estate taxes paid at settlement that will offer little or no tax benefit in 2008.This might be due to the fact that the new homeowner or homeowners will not have enough deductions to itemize deductions on federal form "Schedule A". For taxpayers with adjusted gross income of $100,000 or less, mortgage insurance is treated as qualified mortgage interest for deduction purposes. This deduction phases out at a rate of 10% for each increment of $1,000 over $100,000.
Other Things to Remember
The section 179 limit for 2008 is at a one time level of $250,000. If you are starting a new business, this means that a deduction of $250,000 can be taken for depreciation in year one providing there is income from business sources. This business source income includes W-2 forms from both husband and wife.
There is also bonus depreciation for 2008 for 50% of qualified property. If the business is already in a loss position and ineligible for the section 179 deduction, this 50% could expand a net operating loss that would be eligible for carry back purposes.
It's not too late to form a retirement for your business allowing as much as $46,000 to be contributed and deducted ($51,000 if one has reached the age of 50 or more). A qualified SEP plan can be funded by the due date of the return which is April 15th plus extensions.
Please, for goodness sakes do what I tell you. You are free to do whatever you wish, but my way is better.
Copyright (c) 2009 William Piner
It's not unusual to see clients with capital in PEPs and ISAs in excess of £200,000 enjoying the freedom to switch investments without incurring capital gains tax, personal liability to tax on dividend income or bond interest received within the tax sheltered 'wrapper'.
However, as clients get older and inheritance tax (IHT) becomes an important consideration in their financial planning, many fail to recognise that capital growth from any investment held within the estate may ultimately be worth only 60% of its accrued value. Inheritance tax could easily apply at 40%, both to the assets themselves and any growth achieved over the years.
So the 'tax-free' growth from PEPs and ISAs may not be all it seems...
To illustrate this, let us assume that a male client aged 70 has £200,000 invested in PEPs and ISAs and has no personal need for the income generated of approximately 3% per annum gross.
Current life expectancy for a 70-year-old male is just under 85 years old (source: Faculty and Institute of Actuaries 2007). Assuming a total annualised return of 7% per annum net of costs is achieved, in 15 years' time the portfolio may be worth in the region of £515,000.
If we assume the family home will utilise the nil-rate band* at the time of death (ie, assuming £600,000 for a married couple in today's money), the whole of the PEP and ISA portfolio may be subject to IHT at 40%. The net value passing to the family will then be just £309,000.
If instead, the client had chosen to receive income generated within the PEPs and ISAs and made regular gifts of this surplus income to the family - for example, to help with school fees or to increase tax-efficient pension funding - then the future capital value would be reduced to just £346,000.
The liability to IHT at 40% on those assets would be £138,400, leaving £207,600 passing to the family.
However, income distributions over the period, even ignoring growth on any gifts made, would amount to £150,770 and importantly, be free of IHT in the hands of the person donated to. In total, the family would have received £358,370 - overall, a saving of £49,370 and perhaps more importantly, the next generation would have the use of those funds when they need them most.
In summary, in certain circumstances and especially as clients get older, it may be better to 'cap' growth within the ISA or PEP and to change investment strategy in order to generate increased tax-efficient income for distribution to the investor.
Providing this income can be considered for gifting to the family, there is unlikely to be any eventual liability to IHT under the 'normal expenditure from income' exemption and less capital will find its way into the hands of the Treasury.
Care is required both in terms of recording the gifts and to ensure they meet the criteria for the exemption, ie, they must be 'normal expenditure', made from genuine income and after allowing for the gifts, the person transferring must be left with enough income to maintain their usual standard of living. Even gifts out of income will not qualify for exemption if the person transferring has to resort to capital for living expenses.
Keeping a record of the gifts made is vital as the 'test' for the exemption is only carried out post-death.
Finally, where clients wish to retain access to funds or control of the capital, other approaches such as 'gift and loan' trusts or discounted gift trusts may offer more suitable strategies. However, the overriding objective in all these scenarios is to move future growth outside the estate.
* Projected to increase at 3% per annum and have increased
Key Considerations:
There are a number of options available to you when it comes to estate planning, and inheritance tax mitigation. It is imperative that you consider ALL the options available to you before you take any action.
ACTION POINT
Calculate what your current exposure is to IHT. Once you've done this, devise suitable strategies to help reduce the amount of tax that your beneficiaries would have to pay. It's advisable to speak to an estate planning specialist as of all the financial planning areas, this is probably one of the most complicated.
Both William Piner & Ray Prince are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
William Piner has sinced written about articles on various topics from Facts about Barack Obama, Finances and Religion. William (Ron) Piner, CPAHost of "Better Business"Saturday mornings at 10ETOn WBIS AM 1190. William Piner's top article generates over 12100 views. to your Favourites.
Ray Prince has sinced written about articles on various topics from Finances, Babies and Property Guide. Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Click here fo. Ray Prince's top article generates over 33100 views. to your Favourites.