Ten Ways To Possibly Lower Your Taxes In 2008

Ten Ways to Potentially Lessen Your Tax Burden in 2008

As the end of 2008 is fast approaching, now is the time to make sure you are taking advantage of all the opportunities to minimize and defer taxes. Below are ten key tax management strategies to consider before the New Year.

1. Take advantage of gifting opportunities.
Give your appreciated long-term securities to older children in the 10 tax bracket. Transferring assets lets you lower your capital gains taxes. A parent in the 25 long-term capital gains tax. However, children age 19 or older (age 24 and older if a full time student) in the 10 income tax bracket pay 0 of your adjusted gross income.

2. Know the expiration dates on any company stock option awards.
To minimize the potential tax impact of any stock option exercises you may make, consider a planned multi-year exercise strategy. If your employer allows, you could make gifts of non-qualified stock options to family members. Also, if you haveexercised incentive stock options (ISOs) this year and haveseen the stock’s price decrease from the date of exercise, selling some or all of the stock by year-end can reduce possible alternative minimum tax (AMT) exposure attributable to the stock option exercise. Discuss the income and gift tax consequences with your own tax or legal advisor.

3. Contribute to an existing qualified retirement plan or establish a new qualified plan.
In bull and bear markets alike, maximizing your 401(k) employee contribution is critical to your financial future. If you are a business owner, you can establish a qualified plan by the end of the tax year for the business, (e.g., December 31 for a self employed person or the last day of a corporation or partnership’s fiscal year). You have until the tax filing due date plus extensions for the business, (e.g., October 15 for a self-employed person) to establish a SEP.

4. Tax-loss harvesting: sell investments in a loss position.
Capital losses can offset capital gains. Any excess losses may then offset up to $3,000 of ordinary income. If losses remain, you may carry them to the next year, when the offsetting process resumes.

5. Portfolio reallocation: shifting investments into qualified dividend-paying stock saves on taxes.
The IRS taxes qualified dividend income at the same favorable tax rates that it applies to long-term capital gains�”typically a maximum of 15. You may want to shift investments from holdings with earnings subject to conventional taxes to qualified dividend-paying stocks.

6. Defer interest income from the fourth quarter to 2009.
To do this, purchase Treasury bills or certificates of deposit (CDs) set to mature in 2009. Since you will not receive any taxable interest between now and the end of 2008 on these newly purchased investments, you’ve successfully deferred that income and the related tax obligation.

7. Save for your child’s college education: contribute to Section 529 plans.
Make 529 plan contributions by year-end to qualify for the current year’s annual gift tax exclusion. Section 529 plan lifetime contribution limits vary by plan. Also, you can use up to five years of annual gift tax exclusions in one year, per future student, and not pay gift tax, thus redirecting any future appreciation from the gifted assets out of your estate and into a tax-deferred, or tax-free, growth environment.

8. Consider converting a traditional IRA to a Roth IRA.
If you think your retirement tax bracket will be higher in retirement than it is today, evaluate this option. You will pay income tax today on the transfer, but all distributions will be tax free if the Roth account has been open for at least five years and you are at least age 59 1/2. Contributions can always be withdrawn without taxation.

9. Review your estate plan.
If you have yet to solidify your estate plan or if life events have altered your current estate plan, it’s wise to update your will and revisit your estate planning strategy. Trusts offer the potential of saving substantial money on estate taxes, while also avoiding probate and estate settlement costs. A trustee will also allocate your assets per your intentions.

10. Meet With Your Tax and Financial Advisors Every Year.
Your financial advisor can work with your tax and other advisers to make sure your overall financial strategy is coordinated. By meeting with your tax and financial advisors your portfolio can be adjusted to accommodate changes in both the tax law and in your own goals and circumstances. Consider:

Prepaying certain deductible expenses
Analyzing estimated tax and withholding levels
Evaluating stock options, restricted stock and other deferred income strategies
Reviewing status of capital loss carryovers

Talk to your Financial Advisor to discuss how these and other strategies may benefit you.

Source: Morgan Stanley Invester Insights, November 2008. Brian Bjorklund. He is VIce President and a Wealth Advisor. His contact info is email [email protected] or call 952-921-1906.

We get no money from Brian for any referral fee. But I have worked with Brian for over 8 years and I know how patient he is and explains things very well. He is also very knowledgeable and likes to help people also. Any questions or suggestions let us know. Have a great day.

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