Uncle Sam is coming to dinner!

Plan ahead and enjoy the holidays By Gina M. Barry, Esq. Associate, Bacon & Wilson. P. C. Special to PRIME>/i> It's that time of year again! Most everyone is preparing for the holidays and time is at a premium. Still, the savvy taxpayer will make room in their overstuffed holiday calendar to complete year end tax planning. Planning after January first is not an option unless, of course, you are planning for the following tax year. Year-end tax planning should be completed at least one month before the end of the year so that all tax issues are properly addressed and tax liability is minimized. Offset earned income If your taxable income needs to be offset, you should consider selling assets that have lost value before the end of the year. Losses will offset gains, and to the extent that the losses are greater than the gains, you may be able to write off the losses against your income this year and in future years. If you are holding an asset that in all likelihood will not go up in value, consider a sale at a loss, which may, in turn, reduce taxable income. Calculate your deductions now Often, taxpayers borrow additional funds or make additional charitable contributions in order to obtain additional write-offs against their income. An additional write-off is only available if you qualify to itemize deductions. In order to itemize your deductions, you must have deductions that exceed the standard deduction for the tax year. If you are unsure whether your deductions exceed, or will exceed, the standard deduction after making additional contributions, it makes sense to calculate your deductions prior to making any additional contributions to ensure that the contributions will have the desired effect on your income tax return. Similarly, if you are considering refinancing your mortgage, and if you are paying points, consider whether you should close on December 31st or January 2nd in order to determine the most beneficial year for taking the itemized deduction of these points. Evaluate the gifting option Gifting should also be considered. In 2007, you may gift $12,000 to any person without having to file a gift tax return. If you hold highly-appreciated assets, consider making gifts of these assets, which will reduce the income earned on these assets. Systematic gifting each year in amounts that do not exceed the annual exclusion should also be considered in the event that your estate exceeds the estate tax thresholds $1 million in Massachusetts and $2 million federally as the gifts may substantially reduce your taxable estate. Consider liquidating some assets If you are in need of additional funds, perhaps to pay for all of those holiday gifts and festivities, consider liquidating assets that are subject to capital gains tax as opposed to ordinary income tax. The highest long-term capital gain rate is only 15 percent for qualifying assets. Paying 15 percent on only the gain may be preferable to liquidating other assets that will be more heavily taxed. For example, if you are in a 28 percent bracket, additional withdrawals from your IRA or 401k plan will cause these amounts to be taxable at the 28 percent rate, if not higher. The sale of a capital gain asset (not held in a qualified plan, of course) will trigger a 15 percent capital gain rate on only the gain, which is the amount over the basis. Max out your IRA, 401K For younger, working taxpayers, depositing funds into an IRA or contributing the maximum to a 401k through work should be considered as these contributions will reduce taxable income. Income tax on assets in an IRA or qualified plan is deferred until such time as a withdrawal is made. These assets will continue to increase in value with all gains, income and appreciation being deferred until such time as a withdrawal is made from the account. There are limitations on the contributions that may be made based on income and other specific data, and these limitations must be considered when weighing this option. Tips for the self-employed If you happen to be self-employed, you may wish to consider making contributions another type of a retirement plan called a SEP-IRA or a simple IRA. This type of account allows you to make considerable contributions if you have the funds to do so. You may also be able to set aside funds in a separate account for employees, if desired. If your business has earned considerable income, and even if you think that it may not earn as much in the following year, you should still consider depositing and funding your SEP-IRA in the current year to reduce taxable income. If the following year does not yield the anticipated economic results, there is no requirement to continue funding the account in future years. Double check it all with a pro As with all tax issues, competent assistance should be obtained from a tax professional who has the knowledge and the technical expertise to recognize areas where planning may be available to you. The time to plan is now as once Uncle Sam sits down at the dinner table, there is no controlling his appetite. Gina M. Barry is an Associate with the law firm of Bacon & Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of Estate and Asset Protection Planning, Probate Administration and Litigation, Guardianships, Conservatorships and Residential Real Estate. Gina may be reached at (413) 781-0560 or gbarry@bacon-wilson.com.