Tuesday, August 5, 2008


I apologize for taking the lazy way out with today’s posting – but, knowing how much bloggers like lists, here are 10 mid-year tax moves courtesy of the National Association of Tax Professionals (I have been a member for 20+ years and I occasionally write for their quarterly journal). I have added a few of my own comments in bold italics -

“What is more exasperating than having to pay taxes? Understanding the constantly changing legislation affecting them! Yet, not fully understanding rights and how provisions work together costs taxpayers significantly every year. A mid-year tax review with an expert will help you. Here is why. Following are some common areas fraught with complex rules that cause taxpayers to miss valuable opportunities to leverage their options and lower their tax bills. Financial advisors and tax preparers are experts in these areas so you don’t need to be. Call your tax advisor for your mid-year review soon to discuss your financial plans and learn how you can save on your next tax return.

1) Overpayment or underpayment of taxes. Did you receive a big refund last year? If so, you overpaid and the government kept your money as a tax-free loan while you could have invested it and earned interest. Did you owe? Worse, were you stuck paying {the dreaded - rdf} Alternative Minimum Tax? A mid-year review will help determine where you are and allow you to adjust your withholding now to avoid penalties later. {Federal income tax withholding is treated as occurring evenly throughout the year for purposes of the penalty for underpayment of estimated taxes – regardless of when the money was actually withheld. If you have missed an estimated tax payment, or a special event has caused you to need to make estimated tax payments, you can increase your federal withholding during the 2nd half of the year and have the additional monies treated as being paid in evenly over the 4 estimated tax quarters – rdf}

2) Saving for retirement – IRAs, 401(k)s, profit-sharing, pensions, employer-sponsored plans, etc. Many changes have taken place in the last few years regarding retirement savings plans. The plan you originally began with may have been advantageous when you started it, but it might not be anymore. So much has changed with these plans that it’s important to review them to see if they are still performing as you intended, and to find out if there are new products available that you are not taking advantage of.

Many taxpayers do not have an Individual Retirement Account (IRA) and are missing an opportunity to defray their taxes and save for their own future. One of the primary reasons for not having an IRA is not starting one. Begin now, even if it is only a few dollars a paycheck. The government has increased the amounts IRA holders can save, and those over age 50 can place additional catch-up amounts into their IRAs.

3) Medical savings accounts and health savings accounts. Try comparing your high premium medical insurance plan against a high-deductible plan combined with a health savings account (HSA). You may be surprised at not only which one is less expensive, but reap tax savings besides. And are you using any available flexible spending accounts through your employer? They are another way to reduce taxable income.

4) Estimated tax payments. Adjusting these payments now will avoid underpayment penalties at year-end. {see my comment above under item #1 – rdf}

5) Take advantage of deduction bunching. Some itemized deductions must meet certain thresholds before you can claim them. By being aware of these and managing your expenditures to fall primarily in one year, rather than spread over two years, you may realize significant tax savings. This applies to several expenditures, especially to medical expenses, property tax payments, and charitable donations.

6) Getting married? Or divorced? These life-changing events have very significant tax implications. A divorce or change in child custody arrangements can mean tax implications in several areas. Attempting to reach a divorce settlement or filing taxes without expert financial advice will most likely not be to your advantage. {In light of a situation that I described in a recent post, if you have married and you are changing your name – i.e. the wife taking on her husband’s last name – it is very important that you change your name with the Social Security Administration as the SSA website – rdf}

7) Beneficiary designations, Powers of Attorney, wills, estate planning. Are these working advantageously for you? Do you even have them in place? This is the time to get your plans in order and be sure that tax changes have not changed how you intended these contracts to work.

8) Buying or selling stocks, bonds, real estate, or other investments. Many tax rules apply to all of these transactions. For example, a real estate like-kind exchange may work to your advantage. If you’re selling a residence, perhaps the exclusion for selling a principal residence applies to you. There are capital gains and losses, wash sale rules, long-term gains and losses, and a whole array of other rules when it comes to stocks and bonds. And don’t forget, investment expenses count as miscellaneous itemized deductions when used for the production of income. Handling these transactions wisely, rebalancing, and making changes are the name of the game with investments. Your financial adviser is worth his or her weight in gold here. {Time is extremely precious for your tax preparer during the tax-filing season. I am sure that he/she, like I, would jump at any opportunity to save time during this period. If you sell a vacation or rental property, or stock that you received through a spin-off or merger, especially stock that originally came from a Bell company, or a mutual fund acquired over the years through dividend investment, let your tax preparer work-up the profit or loss now while he/she has the time, rather than waiting till next year’s tax season when time is tight. Send your tax pro the details and documentation for these types of transactions after they have been completed and give him/her something to do during the year. rdf}

9) Financial planning is important when you have children and teens. Coverdell Education Savings Accounts (ESAs) and Section 529 plans are two ways to begin tax-deferred savings for a child’s education. Children grow up quickly, so begin these accounts early, and know how much you can add to them. Discipline yourself to save, and you help both yourself and your child.

Self-employed parents can hire their children or grandchildren and lower the overall family tax bill. The business also may benefit from hiring children under age 18, as their wages are exempt from social security and unemployment taxes paid from a parent’s sole proprietorship. Teens with earned income can make IRA contributions as well. However, if children plan to attend college, it is important to structure savings carefully to best work with college financial aid programs. When children are in college, remember to claim the education credits or the tuition and fees deduction.

10) Self-employed taxpayers and those with small businesses have many ways to plan for tax savings. This is another area where tax preparers prove their value. Several changes in recent years allow flexibility with carrybacks, carryforwards, employee benefit plans, expense deductions, etc. Certain small businesses that start retirement plans for their employees may even qualify for a tax credit to help recover the costs of starting up. The number-one rule-of-thumb here is to carefully document, backup, and substantiate all expenses in order to claim them on tax returns. If you have not done that, you will miss deductions. Timing of purchases and assets can make big differences on your tax return, and some of these things need to take place before year-end to qualify. Work closely with your tax preparer and plan carefully, using his or her advice.”

Any questions on either the NATP suggestions or my comments?


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