Year End Tax Planning for a Happy Holiday Season


As the end of the year approaches, it is a good time to consider actions that may lower your income tax bill this year and possibly next year as well. 2008 year-end tax planning is a bigger challenge than usual due to the substantial declines in the stock market, the difficult economic climate, and the possibility of tax legislation next year. In fact, another economic stimulus package with tax changes could be enacted before the end of this year. A positive factor affecting year-end planning is that Congress has enacted a series of tax laws that could benefit most taxpayers in 2008.

The decline in the stock and real estate markets coupled with low interest rates presents clients with an unusual opportunity to transfer wealth and reduce gift, estate, and generation-skipping transfer taxes using a variety of strategies. Clients can shift future appreciation of assets to younger generations using such techniques as: grantor retained annuity trusts, low interest loans to family members, installment sales to grantor trusts, charitable lead trusts, and family limited partnerships.

The following is a short list of actions based on current tax rules that may also reduce taxes, if you act before year end:

  • Realize losses on stock while substantially preserving your investment position (for example, selling your stock and buying it back more than 30 days later).

  • Postpone income until 2009 and accelerate deductions into 2008 to lower your 2008 tax bill (if you anticipate your income will decrease in 2009).

  • Convert a traditional IRA to a Roth IRA (this will INCREASE your adjusted gross income for 2008 but may allow you to remove any future appreciation in your IRA from income taxation when distributions are taken).

  • Prepay state and local taxes for 2009 by the end of the year for a 2008 deduction.

  • Be sure to consider the Alternative Minimum Tax (AMT) in any planning you implement to make sure deductions you thought would be available are not reduced or eliminated under the AMT.

  • Businesses are allowed an increased expensing option under Code Sec. 179, a 50% bonus first-year depreciation write-off for most new machinery and equipment placed into service this year, and a reinstated research credit for 2008.

  • Self-employed individuals should consider creating a self-employed retirement plan.

  • Take advantage on the annual gift tax exclusion. Each person is allowed to make a gift of up to $12,000 per recipient each year (a husband and wife can gift up to $24,000 per recipient). This amount will increase to $13,000 per person in 2009 (but is not carried over if unused in 2008).

  • Make gifts of stock to take maximum advantage of depressed stock values and the annual gift tax exclusion (or sell depressed stock for a loss and make a gift of the cash, the cash can be used by the gift recipient to repurchase the stock or make other investments).

  • If you are 70 ½ and required to take a minimum distribution from an IRA before year end, you can direct your trustee to distribute up to $100,000 from your IRA directly to a qualified charity without income tax on the amount; this will also be available in 2009. You will not have to include the amount passing to charity in your income (up to the $100,000 limitation) but will not be allowed a separate charitable deduction for that amount either. 

  • The estate and generation-skipping tax exemptions are currently $2,000,000, and both are scheduled to increase to $3,500,000 in 2009. The estate and generation-skipping taxes are suspended in 2010, and the exemption amounts return to their pre-2001 level of $1,000,000 in 2011. The current top rate for estate and generation-skipping transfer taxes is 45%; after the one-year repeal, these rates will return to their pre-2001 rates in 2011, with a maximum rate of 55% for taxable estates over $3,000,000 (and 60% for a portion of an estate in excess of $10,000,000).

  • The federal gift tax will not be suspended in 2010, but the top gift tax rate will fall from 45% to 35% during 2010; in 2011, like the estate and generation-skipping transfer taxes, the gift tax rules will revert to pre-2001 status, with the same tax rates.

  • President-elect Obama has proposed freezing the top rates and exemption amounts at their 2009 levels and indexing them for inflation. He has also proposed making the exemption amount portable between spouses. However, due to the current state of the economy and projected loss of revenue to the government, some proposals include extending the 2009 top rates and exemptions only to 2010 (with no one-year repeal), and allowing them to return to their pre-2001 levels in 2011 as a means of increasing revenue to the government. The IRS continues to discuss additional changes to the gift, estate, and generation-skipping transfer taxes, including disallowance of valuation discounts for intra-family businesses (such as investment partnerships), restrictions on the use of grantor retained annuity trusts, and eliminating qualified personal residence trusts.

The strategies discussed above are not suited to every situation. If you have any questions about any of the planning strategies discussed above, please do not hesitate to call any member of our group listed below to discuss how any of these strategies would affect your particular situation.

Haynes and Boone’s Private Client Group has extensive experience assisting clients with wealth preservation, accumulation, and transfer. We represent a diverse client base in connection with strategies such as business planning and succession, minimization of income taxes and gift, estate, and generation-skipping transfer taxes on wealth transfers, charitable planning and exempt organizations, planning for non-U.S. citizens, as well as administration of estates and trusts. For more information on the Private Client Group and its members go to Private Clients and Estate Planning.

In order to comply with certain U.S. Treasury regulations, we are informing you that any U.S. federal tax advice that may be contained in this document is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. federal taxing authority or agency or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Email Disclaimer