Are you expecting a tax refund this year? It might be delayed. Congress hasn’t yet agreed on how to cap an automatic tax increase that could catch more people than the law originally intended. Assuming the change is finally passed, the IRS will have to redo its tax forms (they’re already at the printer) and reprogram its computers—a changeover that could take up to seven weeks. If the filing season can’t get underway until early February, more than 13 million refunds could be delivered late.
The sticking point is the alternative minimum tax (AMT), which raises taxes on people with high deductions relative to their incomes. Last year it mainly affected taxpayers with cash incomes of $200,000 to $1 million. But the AMT isn’t indexed to inflation. Unchanged, the 2007 AMT could hit more than two thirds of taxpayers with cash incomes between $100,000 and $200,000 this year, and more than one third of those with incomes of $75,000 to $100,000, according to the Urban-Brookings Tax Policy Center.
The House passed a fix, called a patch, last month, but the Senate deadlocked over how to pay for it. A rising AMT is built into the government’s long-term budget projections. Capping it just for 2007 will cost $50 billion over the next 10 years. Democrats want to fill that gap by raising taxes on certain superhigh-income people whose compensation is taxed at low rates. Republicans want to add the $50 billion to the deficit, and they have the votes to block the bill.
Tax professionals expect that the patch will pass. Accountant David Kahn of RSM McGladrey is advising his clients to include the change in their estimated tax payments for the year. Here are some more tips from the pros:
Do you have year-end cash? Add it to your retirement account if you haven’t been funding it to the max. You can contribute up to $4,000 to an IRA (plus an extra $1,000, if you’re 50 or up) and $15,500 to a 401(k) (plus $5,000 at 50 or up). Next year your contribution ceiling rises to $5,000 for the IRA, plus the 50-or-up bonus. Don’t hold back on your retirement investments if stocks look bad. You never know when the market will leap.
Did you sell your house at a loss? It’s not tax-deductible. If you sold in order to take a new job and the company reimburses you for the money you lost, that’s taxable income, says tax attorney Julian Block. You do get a deduction if you rent out your home while waiting for a buyer and, later, sell at an even lower price. You may be able to write off the loss that occurred from the time you got the renter.
Do you have a flexible spending plan at work? You have until the year-end to sign up for 2008 contributions to accounts that help pay your uninsured medical bills and the cost of caring for a child or other dependent. The money comes out of your paycheck and lets you cover these expenses pretax.
Are you saving for college in your child’s name? The income from those investments is taxed in your bracket if the child is under 18. Next year this “kiddie tax” gets worse. You’ll be taxed if the child is under 19 or a full-time, dependent student under 24. If your child is currently 18 or a little older, the account contains capital gains and you’ll need that money soon, sell before the year-end while the tax is still only 5 percent, says Mark Luscombe, analyst for the tax-information firm CCH. For college savings, 529s are a better choice.
Have you planned for the fabulous break next year on investment profits? From 2008 through 2010, there’s no tax on capital gains for people in tax brackets up to 15 percent. For 2008, that’s a taxable income of $65,100 for couples and $32,550 for singles (including the gains from asset sales).
The average working stiff won’t have any stock gains to cash in, but for people of wealth it’s another matter. Parents might consider giving appreciated stock to their young-adult children (those out of kiddie-tax range) to repay their college loans or make a down payment on a house. The kids could sell the stock tax-free, says Donna LeValley, contributor to the tax-guide publisher J.K. Lasser Institute. The same tactic applies to young people 19 and up who are moving from school directly to jobs, says Kaye Thomas, author of “Capital Gains.” Parents could give them stock to sell before they start earning a paycheck. Retirees might sell appreciated assets to cover their household expenses rather than taking money out of their taxable IRAs. Prospective retirees could delay the start of their Social Security checks, temporarily living on tax-free stock sales instead. You’ll hear more ideas in the year ahead. The prospect of zero taxes brings out the planning genius in everyone.
Reporter Associate: Temma Ehrenfeld
