This article aims to highlight certain strategies you may or may not be aware of, provide updates on any relevant changes that came into effect in 2007, and remind you about crucial deadlines and "to-dos."
I recommend you speak with your tax adviser to better understand how any tax-planning strategy might affect your particular situation. Your financial adviser can speak with your tax adviser on how to implement any financial and tax-planning strategies.
Time could be money when it comes to recognizing gains. Investment income, such as that from capital gains and dividends, is taxed at a different rate than earned income. Because these rates are subject to change, you might be able to take advantage of this by planning when to recognize certain long-term capital gains.
In recent years, there have been a number of tax law changes. In 2003, Congress lowered the maximum dividend and capital gains tax rates for most (but not all) dividends and capital gains to 15 percent for qualifying taxpayers.
Taxpayers in the 10 percent and 15 percent tax brackets are eligible for an even-lower rate of 5 percent. In 2008, the rate for taxpayers in the 10 percent and 15 percent tax brackets falls to zero. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extends the cuts for two more years, through Dec. 31, 2010.
In recent years, there have been a number of tax law changes. The 2007 capital gains rates are:
• 28 percent for gains on collectibles and on qualified small-business stock.
• 25 percent on certain gains for the sale of some types of depreciable real estate property.
• 15 percent for other gains.
Different rates could apply to long-term capital gains in 2007-10. So it's important to check with a tax adviser on what you owe, and to plan when it might be advantageous to recognize certain gains, if possible.
The Alternative Minimum Tax is a concurrent tax system calculated by disallowing some of the exemptions, deductions and credits that you use to calculate your standard income tax. You will then owe whichever tax is higher - the AMT or your "normal" amount. Taxpayers with children, mortgages, deductible expenses and those who live in high-tax states are usually subject to the higher AMT rates.
For the majority of people subject to the AMT, the following changes for 2007 amount to a tax increase.
The AMT exemption amount (the amount not included in AMT income) has decreased to $33,750 ($45,000 if married filing jointly or qualifying widow(er) or $22,500 if married filing separately)
The minimum exemption amount for a child under age 18 has increased to $6,300.
The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired.
Credits for child- and dependent-care expense, the elderly or the disabled, education, residential energy, mortgage interest and District of Columbia first-time homebuyers are no longer allowed against the AMT.
Instead, a new tax liability limits applies, which is your regular tax minus any tentative minimum tax (figured without any AMT foreign tax credit.)
It is critical for you to talk with your tax adviser before the end of the year to determine if you will be subject to the AMT. If you are, then instead of trying to increase your deductions in 2007. Your tax adviser may suggest that you try to decrease your non-AMT deductions and increase your income. This is the exact opposite strategy you would implement if you were not subject to the AMT.
Beware when selling depreciated securities. If your capital losses exceed your capitals gains this year, you may deduct the net loss from your ordinary income, up to $3,000. Capital losses greater than $3,000 may be carried over to future tax years. Should you decide to sell depreciated securities, beware of the wash-sale rule.
You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss, and within 30 days before or after the sale you:
• Buy substantially identical stock or securities.
• Acquire substantially identical stock or securities in a fully taxable trade.
• Acquire a contact or option to buy substantially identical stock or securities.
If you sell stock and then your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. If your loss was disallowed because of the wash-sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your cost basis in the new stock or securities.
This adjustment postpones the loss deduction until the disposition of the new stock or securities. The holding period of the old stock is added to the holding period of the newly acquired stock.
For more information, e-mail william.a.creekbaum@smithbarney.com or call 689-8700.
• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, 6005 Plumas St., Ste. 200 Reno, NV 89509.