Year-End Tax Review

Time is running out on moves you can make to reduce your 2007 tax bill. Some actions to consider right now:

• Be sure to max out your 401(k) plan at work. This year you can sock away $15,500 ($20,500 if you're 50 or older).
  
• Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan's first three years.
  
• Make 2007 gifts to individuals to utilize your tax-free $12,000 per donee gifting allowance.
  
• Plan year-end business equipment purchases to take full advantage of the increased expensing limit of $125,000 for 2007.
  
• The option to deduct either sales taxes or state and local income taxes was reinstated for this year. If you plan to deduct sales tax, check with us about squeezing planned purchases of certain big-ticket items into 2007.
  
• Also reinstated for this year is the above-the-line deduction for up to either $2,000 or $4,000 (depending on your income) for tuition and college expenses. Be sure your payments are timed to maximize this tax break.
  
• Review your investments for possible year-end selling to rebalance your portfolio at the lowest tax cost or to offset gains and losses.
  
• When you sell assets, you'll have a capital gain or loss. Remember that capital gains on assets held for more than 12 months enjoy lower tax rates. For shorter holding periods, you'll pay tax at ordinary income rates.
  
• Don't forget to include any reinvested dividends when you calculate your cost basis for mutual fund shares.
  
• You can use capital losses to offset capital gains. Excess capital losses can even offset a limited amount of ordinary income.
  
• Watch out for the "wash sale rule." If you sell stock and then reacquire substantially identical securities within 30 days of a sale, you can't deduct a loss from the sale.
  
• Not all dividends on stocks and mutual funds are taxed at the same rate. "Qualified" dividends paid by most U.S. and some foreign companies enjoy lower rates of 5% or 15%, depending on your tax bracket.
  
• Beginning in January 2008, the tax rate on certain dividend income and long-term capital gains goes from 5% to 0% for taxpayers in the bottom two regular tax brackets (10% and 15%). There may be strategies you should consider to take advantage of this rate change, such as timing investment sales or deductible expenses.
  
• Interest payments on corporate and U.S. bonds are generally taxed as ordinary income.
  
• Income on most state and municipal bonds is usually tax-free. The financial benefit of owning tax-free bonds depends on your tax bracket, among other factors.
  
• Changing investments within a tax-sheltered retirement account doesn't have any immediate tax consequences. You'll pay tax at ordinary income rates when you take distributions.
  
  Remember, taxes shouldn't drive your investment decisions, but they are an important factor to consider. For guidance with the tax issues in your investment review, give us a call.
  
  An important part of our service to you is to help identify actions you can take before year-end to minimize your 2007 income tax bill. Accelerating deductions, delaying income, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. There are also tax credits that require careful planning or they may be lost.
  
  If you'd like to discuss tax-cutting options that fit your particular situation, please contact us soon for a year-end planning review.
  
  ~ Ed Mitchell, http://www.mr-cg.com
  
  We at JIAN like to pass along useful ideas to our entrepreneurial customers. When you have something to share, please email us here:
  

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