Year-end tax planning moves are once again complicated by political uncertainty. But this time, Congress isn't the cause. Representatives and senators actually passed the expected end-of-session tax law changes in early October.
The reason for tax planning ambiguity this time is President-elect Barack Obama. The soon-to-be commander in chief made it very clear during the campaign that some folks would eventually face higher taxes. The big question is, "When?"
"A lot of year-end tax planning is accelerating deductions and deferring income," says Steve Kunkel, director of taxes at CBIZ MHM in Los Angeles. But the possibility that taxes could be higher in 2009 has people second-guessing conventional tax planning. "People say, 'Gee I may defer that tax this year, but am I effectively deferring into a higher tax rate next year?'" says Kunkel.
Of course, that's not necessarily a foregone conclusion. "Obama is also aware that he's dealing with a difficult economy, so he also must look at an additional stimulus package," says Kunkel. "Most economists will tell you that it's counterproductive to have a tax increase and stimulus package simultaneously. The first priority is to get the economy back on track."
That economic balancing act makes end-of-2008 tax moves a bit more speculative than usual. "What I tell people," says Kunkel, "is that if you believe that tax rates are going to stay the same for 2009, then the traditional tax planning, that is, accelerating deductions and deferring income, makes sense."
So what should you do in the next few weeks? Here are some tried-and-true year-end tax moves, some tax actions created by recent tax law changes and a few other options to consider where the tax picture isn't yet clear.
1. Assess your assets With the stock market's wild gyrations, investment moves are atop most people's end of year to-do lists. For many, that will mean taking tax advantage of losses.
"As investors look at portfolios, they probably don't have to look very far to see losses," says Kunkel. You can use those to offset any capital gains you might have or, if you have more losses than gains, you can use up to $3,000 of the excess losses to reduce your taxable ordinary income. And if you have even larger losses, you can carry over the amount in excess of $3,000 to future tax years.