Capital Gains and Dividends
For people in the 10% or 15% federal income tax bracket,
there is no tax on listing term capital gains and qualified
dividends starting this year and through 2010.
Strategy: If you are in one of these brackets, this is a
great time to cash in profitable long-term investments that
you had considered selling anyway and/or whose prospects
have dimmed since you bought them.
This year would be an especially advantageous time to do
so if you expect to shift into a higher bracket next year. Also,
it is a good time to favor the many stocks and funds that
generate qualified dividends.
If you are in a higher tax bracket, consider giving some
investment holdings rather than cash as a gift to a family
member who is in the 10% or 15% tax bracket.
This way, you will avoid paying up to 15% on any capital
gains and qualified dividends on these holdings. The strategy
is especially effective if you are planning to sell the holdings
anyway and they would generate big capital gains.
Example: You own 100 shares of XYZ Corp. that you
bought several years ago for $4000. The shares now are
worth $10,000. You are helping to support your mother, who
is in the 15% tax bracket. Instead of giving her $10,000 cash
toward her needs, give her the shares. She can sell them for
$10,000, and neither you nor she will have to pay any tax on
the $6,000 gain.
In 2008, you can give up to $12,000 per person to as many
people as you want ($24,000 if your spouse consents to make a
joint gift) without running into a gift-tax requirement.
Caution: Generally, it no longer makes sense to give
investment assets to your children for tax purposes until they
are independent adults. Starting in 2008, dependent children
under age 24 who do not provide more than half of their own
support are subject to the so-called kiddie tax. That requires
them to pay tax on investment income over $1,800 at the
parent’s top rate. (The children pay no tax on the first $900
and pay at their own rate for the next $900.)
Retirement Accounts
IRAs. The annual IRA contribution limit this year is
$5,000, up from $4,000 in 2007. Individuals age 50 and older
by year end can add another $1,000, for a $6,000 contribution
limit. You can contribute up to these amounts, in total, to a
traditional IRA and Roth IRA.
To qualify for making full contributions to Roth IRAs,
taxpayers filing jointly must have no more than $159,000
in modified adjusted gross income (MAGI) this year. That
limit is $3000 higher than it was in 2007. If they have
between $159,000 and $169,000 in income, the amount they
are permitted to contribute shrinks - above $169,000, no
contribution is permitted.
For single and head-of-household filers the income cap
for full contribution is $101,000, up from $99,000, and no
contribution is allowed with income above $116,000.
Strategy: Although you have until April 15, 2009, to make
a 2008 IRA or Roth IRA contribution, the earlier you do so,
the sooner you can start to earn tax-advantaged income. If
you are skittish about the volatility of today’s stock market,
you can put the money initially in a safe, interest-bearing IRA
investment, such as a money market fund.
401(k)s. Starting in 2008, companies can authorize
automatic enrollment of employees in their 401 (k) plans.
This means that an eligible employee who doesn’t opt out
within 90 days or choose to contribute a smaller amount will
have 3% of his/her salary put in the 401 (k) the first year
and one percentage point more in each succeeding year untilcontributions reach 10% of salary (up to certain dollar limits).
The money will be put into a default investment chosen by
the employer unless you instruct the plan administrator to
do otherwise. The default investment is likely to be a target
date retirement fund whose portfolio grows more conservative
over time...a balanced fund (which holds a mix of bonds and
stocks)...or a professionally managed portfolio of various
funds.
Strategy: If you are already participating in your employer’s
401 (k) but your contributions are below the minimum amount
under automatic enrollment, consider voluntarily increasing
the contribution to beef up your retirement savings. If you
are not contributing, check with your employer about how
automatic enrollment will affect you.
If you want to contribute more or less than the automatic
amount, ask what steps you must take . You can shift up to
$15,500 of your salary ($20,500 for those age 50 or older by
year-end) to the 401 (k).
If you don’t like the automatic investment choices, choose a
different one from the plan’s options, taking into account the
kinds of investments you have outside the 401 (k) as well.
401 (k) Roth conversions. Starting in 2008, you can directly
convert funds from a traditional IRA, rather than going
through cumbersome process of first transferring the funds to
a traditional IRA and then converting that account to a Roth
IRA, as would have been necessary previously.
Strategy: When you leave an employer, consider
transferring 401 (k) assets to a Roth IRA, rather than a
traditional IRA. Although you must pay tax on the amount
converted, the investment will grow tax-free from then on.
You cannot convert to a Roth if your MAGI is more than
$100,000.
Inflation-Adjusted Breaks
As a result of cost-of-living adjustments, you may be eligible
for greater tax savings. Inflation-adjusted items include...
- Each personal and dependency exemption for 2008 is
$3,500, up from $3,400 in 2007.
- The standard deduction is $10,900 for married couples
filing a joint return, up $200...$5,450 for single people and
married individuals filing separately, up $100...and $8,00 for
heads of households, up $150.
- The maximum Hope tax credit for college expenses in the
first two years of post-secondary education is $1,800, up from
$1,650 in 2007.
- An employer can provide up to $220 per month tax-free
in parking benefits for an employee this year, compared with
$215 per month in 2007... and up to $115 per month for
transit passes, compared with $110 last year.
- The standard mileage-rate deduction for business-related
driving this year is 50.5 cents per mile, up from 48.5 cents per
mile last year and 44.5 cents per mile in 2006.
Barbara Weltman, an attorney in Millwood, New York, the author of J.K.
Lasser’s 1001 Deductions and Tax Breaks 2008 (Wiley)
