Tax Tips

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By Brian Zen, CFA 
At, our mission is help people build wealth with peace of mind. We understand that there can be no peace of mind unless we clear up the tax headaches timely and effectively. Here we compiled a comprehensive list of useful tips for reducing Uncle Sam’s bite into your earnings.  

ZENWAY.COM INC. wealth management tax planning estate strategies

211 north end ave. new York, ny 10282 t. 212.786.3018 [email protected]

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Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes.” To most Americans, preparing taxes is a dreadful chore. At, our mission is help people build wealth with peace of mind. We understand that there can be no peace of mind unless we clear up the tax headaches in timely and effectively. That’s why we started our Tax Services Division. To help our clients tackle their tax issues intelligently, we compiled the following list tax saving tips and best practices. Get into the habit of keeping good records all year round. You can avoid headaches at tax time by forming the habit to keep track of your receipts and other records throughout the year. Habit is the most powerful force in human lives. John D. Rockefeller never completed any formal education. Bookkeeping is the only class he took as a teenager and he started to run his life as a bookkeeper recording his expenses religiously throughout his life. The habit of bookkeeping became the fundamental driving force to make Rockefeller one the greatest businessmen ever lived. That’s how important bookkeeping is. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience. Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer. Keep all business-related receipts. Keep track of what the receipts are for, and save them in a safe place. Check your retirement balances. That overfunded IRA or pension plan is well worth looking at before the year is over if you're at or approaching retirement age. Review your current medical expenses and other itemized deductions, and your overall taxable income to see if you can withdraw money from those accounts tax-free or at very low tax rates (10% - 15%). This is the time to start reducing those balances if they are very high -- say over $500,000. When you're over 59 1/2 there are no early-withdrawal penalties. So people running up expenses far in excess of taxable income, say seniors paying substantial wages or fees for in-home care, may be able to pull money from those retirement accounts without paying taxes on it. Review your alternative minimum tax situation. If you're likely to be subjected to the alternative minimum tax, it's time to start looking at your expenses to see if they really should be itemized or if it's possible to split some of the expenses between Schedule E, Schedule C and Schedule A. Reducing your adjusted gross income will help, but reducing your itemized deductions is beneficial all around. But only do it if the splits are truly justified. Deal with big stock winners. Suppose you have stocks showing substantial gains that you'd like to sell, but you're already in a high tax bracket. See if anyone close to you (very close family member or friend) is sitting on a high capital loss carryover. Especially one they have no hope of using up in their lifetimes. Consider gifting them your highly appreciated stock. They will get the stock with your low basis. But they won't pay any tax because their capital loss carryover will eat up the profits. Update your family tax records. Build a file for each family member. The file should include a recent photograph, a copy of each person's Social Security card, or Individual Taxpayer Identification Numbers confirmation, copy of their birth certificate and passport. You never know when you will need those things. And if you do need them in a hurry, having them in one place will save time and money. Corral cash receipts. Start gathering and organizing the receipts you paid by cash. It's time to enter them into your books so that you can use them to calculate deductions. Get your appointment calendar out and see if you have any lunches, dinners, etc. for which you paid cash that you've never recorded. Remember to take into account parking meters, pay phones, valets, tips to doormen, porters, hairdressers, etc. Look through your car, at your visor, pockets, etc. for the various receipts you've been stashing. Pay your January 1st mortgage payment on or before December 31st. 


This allows you to take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you a 1098 form. Teachers, take a deduction from your students. You can still take up to a $250 deduction on materials purchased to make the learning experience better for your students. This deduction is also applicable for principals and others who are employed in a school. If you’re not sure if this deduction applies to you, contact the IRS. Prepay your state and/or local taxes. If you don't think your personal income tax bracket will be higher next year, and you're not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year. Take all applicable tax credits. Tax credits are more valuable than tax deductions. Claim home energy tax credit if you installed energy efficient air conditioners, windows, etc. For each child under the age of 17, there is up to a $1,000 tax credit. There are also various other credits, such as those available when you adopt a child or when you elect to claim a Lifetime Learning Credit. Take a loss. If you’ve done well with your investments and are looking at significant capital gains, prior to year-end is the time to offset some of those gains by selling a losing venture. Also, remember that you can carry forward up to $3,000 from previous years’ losses. Consider tax-free investments. Returns are not very high, but if you're looking for a safe, tax-friendly investment, consider tax-free government or municipal bonds, among other such investments. This type of investment is particularly good for a high-income individual. Remember to deduct state income taxes or state sales taxes. Save all your purchase receipts to document the state sales taxes which you may be able to deduct from your federal tax return, where you can choose either to deduct state income or sales taxes. Year-end income-expense management may help. Delay bonus, revenue, rent if you think you will be in the same or lower tax bracket next year. Accelerate income if your tax bracket will be higher next year. Accelerating payment of deductible expenses due in January can pull the write-offs into 2007. This could apply to an estimated state income tax bill due January 15, for example, or a property tax bill due early in the next year. Or a doctors or hospital bill. (But speeding up deductions could be a blunder if you're subject to the Alternative Minimum Tax, as discussed below.) Defer income only when necessary. Being self-employed, you can alter your billing slightly to defer income if you see yourself heading into a higher tax bracket. Increase expenses if necessary. Just as you can elect to defer income, if you see that your income is high, you can make many more year-end business purchases to add some tax deductions before December 31st. Before you go into high gear racking up deductions, make sure you'll be itemizing for next year rather than claiming the standard deduction. Unless the total of your qualifying expenses exceeds $5,350 if single or $10,700 if you're married and will file a joint return, itemizing would be a mistake. Get receipts for your charitable contributions. Note this change in the rules for charitable contributions that first applies in 2007: You must have either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit. (Before 2007, you only had to have a receipt to back up contributions of $250 or more.). While donations should not be made simply for tax 

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purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax bite. Remember to get receipts. Donate appreciated stock or property rather than cash. As long as you've owned the asset for more than one year, you get to deduct the market value on the date of the gift and you avoid forever paying capital gains tax on the appreciation that built up while you owned the asset. The charity you're interested in helping can help you with the details. Consider “bunching”. If you are on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off. In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount - because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end plans stress pushing as many deductible expenses as possible into the following fat year when they'll have some value. Tango with AMT (Alternative Minimum Tax). Sometimes accelerating deductions can cost you money… if you're already in the alternative minimum tax (AMT) or you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions and congressionally created loopholes to drive their tax bill to zero, or close to it, the AMT is now increasingly affecting the middle class. And that can be a particular problem for people who are not used to figuring out sticky tax issues. The AMT is figured separately from your regular tax liability — with different rules — and you have to pay whichever tax bill is higher. This is a year-end issue because certain expenses that are deductible under the regular rules — and therefore it might make sense to accelerate payments — are not deductible in AMT-land. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Also, while medical expenses that exceed 7.5% of your adjusted gross income can be deducted under the regular rules, the threshold is 10% for the AMT. Interest on up to $100,000 of home-equity loan debt is deductible under the regular rules, no matter how you use the money — so you want to be sure you're up to date paying that interest. But under the AMT, home-equity loan interest is only deductible if the money was used to buy or improve your primary or second home. In recent years, lots of taxpayers fell into the claws of the AMT because of the AMT's special treatment of incentive stock options. Sometimes, though, selling stock acquired via options before the end of the year can get you out of AMT-land. Sell loser stocks. Your portfolio cries out for special attention as the year draws to an end. Since it's up to you when to sell securities — and convert paper gains and losses to real ones — you can mix and match your trades to deliver the tax outcome you desire. Begin with an outline of exactly where you stand. Draw up a list of your trades so far and the gains or losses on each. Make another list showing your current holdings and the paper gain or loss to date. In other words, if you sold the securities today, what would your profit or loss be? Because the tax law treats different kinds of gains differently, you need to segregate your long-term (for securities owned more than one year) and short-term sales (for securities owned one year or less) so far this year and your open positions that would produce each kind of gain or loss. A strategy for net gain. If your trades so far in 2007 have resulted in a net gain, take a hard look at the securities in your portfolio that show paper losses. Maybe now is the time to unload some of those stocks, using the loss to sop up the gain on other deals and pull down your tax bill. It's not a cockamamie idea to realize losses to save on taxes. After all, you suffered the loss when the securities fell in value. Selling just makes it official… and makes the IRS pick up part of the loss. What if you have a net short-term gain, which will be taxed at your top tax bracket? Taking any kind of loss — short or long term — can offset that gain dollar for dollar. And, although long-term gains get gentle tax treatment, net losses from either category can be deducted in full against other income such as your salary, up to a $3,000 annual 


maximum write-off. Any net losses beyond the $3,000 write-off are carried over to cut your tax bill in the future. A strategy for net loss On the other hand, if your sales so far have produced a net loss, perhaps you should go in for some year-end profittaking. As noted, only $3,000 of net losses a year can be used to offset income other than capital gains, so if you have a bigger loss, you have an incentive to cash in some of your other profits. Because the loss will offset additional gains dollar for dollar, you can add to your income without adding to your tax bill. Of course you don't want to let the "tax tail wag the investment dog" by allowing the search for tax savings to lead you into bad investment decisions. Your investment goals must be paramount. But if a particular investment is on the sell-or-hold borderline, perhaps the tax consequences can be decisive. Last-minute sales Since it takes several days to settle a trade — between the time you order the sale to the time you get your money — sales during the last few days of the year often straddle year-end. As far as the IRS is concerned, a gain or loss should be reported on the return for the year the trade occurs, regardless of when settlement takes place. That means profits and losses taken as late as the closing bell on New Year's Eve go on the current year's return. Bond Swap The point of this year-end maneuver is to lock in a tax loss by selling bonds that have fallen in value (usually because market interest rates have risen) and reinvesting the proceeds in other bonds. Done right, you can maintain the income stream from your bonds. Consider this example: Assume you own $100,000 worth of AA-rated bonds with a 6% coupon and a maturity date in 2016. In November, as you begin your year-end planning, the market price of your bonds has slipped to $84,750. If you sell at that price, you'll have a $15,250 loss. At the same time, assume you can buy $100,000 face value of AAA-rated bonds, with a 7% coupon and a 2015 maturity, for $83,612. If you sell one set of bonds and buy the other, look what happens: Since they have the same par value and coupon rate, your annual income remains the same: $7,000. Your bond rating increases from AA to AAA. You pull $1,138 out of the investment — the difference between what you got for the old bonds and what you paid for the new ones. And you can claim a $15,250 tax loss. If it offsets gains that otherwise would have been taxed at 20%, you save $3,050. As with much year-end tax planning, the earlier you begin scouting for promising candidates for swapping, the better. The supply dwindles and competition from other investors heats up as the year draws to an end. Watch out for mutual fund ex-dividends. Mutual funds often pay out most of their capital gains and dividends in December — and this year more than $400 billion will be paid out, a new record. Don't think you're getting a windfall if you buy just before the payout. It's a tax mistake. When interest, dividends and profits are paid out, share values fall by the same amount. But the payout is taxable; you're better off buying after the distribution — you get your shares at the lower price and avoid the tax bill on what is essentially a rebate of part of your purchase price. Before you invest, call the fund to ask for the exdividend date — and buy after that day. If you plan to sell shares around year-end, it usually makes sense to do so before the ex-dividend date. When you sell, any accumulated dividends and capital gains are included in the share price and therefore are considered part of your profit. If you've owned the shares more than 12 months, you get 15% long-term capital-gains treatment. When the fund pays out the dividends, the share price drops… and so does your taxable profit when you sell. But the 15% gains are replaced dollar for dollar by the income distribution — part of which could be taxed in your top bracket, as high as 35%. Max out your IRA contributions. There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes. Company-sponsored 401(k) plans may be the best deal because employers often match contributions. 

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Bump up your 401(k) contribution so that you are putting in the maximum amount of money allowed ($15,500 for 2007). If you think you can't afford it, run the numbers. If you have a traditional 401(k), the fact that pre-tax money goes into your account means your savings go up more than your take-home pay goes down. If you're in the 25% federal tax bracket, for example, stashing an extra $1,000 in your 401(k) cuts take-home pay by just $750, and even less if you live in a state with a state income tax. If your firm offers the new Roth 401(k) option, an extra $1,000 into the account really cost you $1,000 now, because after-tax money goes into a Roth 401(k). But the fact that withdrawals in retirement will be tax free could make this the better home for your increased contributions. If you are 50 or older by the end of the year, you are eligible to make "catch up" contributions to your 401(k) plan, if your employer's plan allows this provision. If you qualify for the "catch up," you can contribute an extra $5,000 to your 401(k) plan in 2007, for a total of $20,500. If you're lucky enough to get a year-end bonus, you can steer part of it to your 401(k), if you haven't already maxed out. Also consider contributing to an IRA for yourself and your spouse. You have until April 15, 2008, to make IRA contributions for 2007, but the sooner you get your money into the tax-shelter, the sooner it earns tax-deferred (in a traditional IRA) or tax-free (in a Roth version) returns. The basic contribution for IRAs (either traditional or Roth or a combination of the two) for 2007 is $4,000, but those 50 and older by year end can contribute an extra $1,000 for a total of $5,000. Self-employed people should set up Keogh plans by December 31. Once the plan is in place, you can contribute up to $45,000 until the tax filing deadline (including extensions) for your 2007 return. Every dime you contribute can be deducted on your return to cut your tax bill for 2007. Avoid Kiddie Tax while you can. The kiddie tax taxes a youngster's investment income over $1,700 at the parents' rate. For 2007, the tax disappears when a child turns 18; starting in 2008 it expands to cover children under 19 and full-time students under 24. A money-saving, year-end opportunity is best told with an example. Say you own $10,000 worth of stock that you bought years ago for $5,000. If you sell, you'll owe the 15% capital gains rate on $5,000, costing you $750. But give that stock to an 18- to 23-year-old to sell by year-end and the gain will be taxed at just 5%, saving the family $500. Your broker can tell you how to make the gift. Remember to take your mandatory IRA distributions before year end. If you are lucky enough to reach age 70 1/2 (or if your parents have), remember that the law demands that payouts must be made from traditional IRAs after the owner reaches that age. Failing to take out enough triggers one of the most draconian of all IRS penalties: The government will relieve you of 50 percent of the amount that should have come out of the account but did not. How much you need to withdraw is based on your age, your life expectancy and the amount in the account at the beginning of the year. In the year you reach 70 1/2 — that is, the year of your 70th birthday if you were born before July 1, the year you turn 71 if your birthday is after June 30 — you have until the following April 1 to take your first mandatory IRA distribution. After that, annual withdrawals must be made by December 31 to avoid the penalty. 

If you make a withdrawal at year end, consider asking your IRA sponsor to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding could let you avoid the hassle of making quarterly estimated tax payments. Note this: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs. Use up your flexible spending accounts, or else. If you have a flexible spending plan, which means you have put aside before-tax earnings to cover medical and dental expenses through a plan offered by your employer, you need to use it up, or you forfeit the balance. Make doctor appointments now and buy necessary medical supplies that are covered in the plan.


Flex plans are fringe benefits offered by many companies that let employees steer part of their pay into a special account which they can then tap to pay child-care or medical bills. The advantage is that money that goes into the account avoids both income and Social Security taxes. By avoiding a 25% federal income tax bracket plus the 7.65% Social Security tax, $1,000 funneled through a flex plan can pay bills it would take $1,554 of salary to pay. The catch is the notorious "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess. That rule used to create a stampede to drug stores and dentists and optometrists each December as employees with money to spend rushed to use it before it disappeared. Now, however, the IRS allows companies to build in a two and one half month grace period. That allows employees to spend 2007 set-aside money, for example, as late as March 15, 2008. But you get this break only if your company has adopted the grace period. Make sure you understand your firm's rules and, if you've got leftover money that has to be spent by December 31, get crackin'. Another important year-end point about flex plans. If this is open season at your company — when you must decide how much to set aside for 2008 — be aggressive. This is a very powerful tax-saver… so powerful, in fact, that you can actually forfeit 25% or more of the money and still come out ahead. You don't want to forfeit a dime, of course, so don't go overboard. But don't cheat yourself by being unduly afraid of the use-it-or-lose-it rule. Be generous at gifting if you can. You can give up to $12,000 away tax-free to each person you choose. This is typically for retirees with significant assets who want to gift money now, rather than leave it for estate taxes later. Put your (over 14-year-old) children on the payroll. By having them do some work for you, you’ll be able to shift some of your income that would be taxed at a higher rate to their lower tax bracket without being hit with kiddie taxes. Be careful, however, because college financial aid could be affected by their income. Starting your own business can be financially rewarding. Technology and the ease of telecommunication have prompted more consultants, coaches, contractors and freelancers to take business matters into their own hands. Self-employment is no longer a means of making some extra money but a full-time career, and many such full-timers are punching their own time clocks and making excellent incomes. The self-employed have unique tax concerns. Below are ten helpful tax tips to help lessen Uncle Sam's tax bite: Deduct home office rental and utility expenses. Whether you have a separate office facility or are using a portion of your basement or a converted den, you can deduct the percentage of your home used exclusively for business purposes. Take this percentage off of your mortgage or rent payments as well as your utilities. If you have a phone exclusively used for business, deduct those phone bills. Keep receipts for all deductable expenses. Keep receipts and good records of business travel and other expenses including office supplies, postage and shipping costs, dues, subscriptions, and anything else business-related, including computer software for your business and upgrades to your system. Deduct child care costs. There are allowable deductions for daycare, nanny care, babysitting and any other type of childcare provided while you are working. Take the deductions allowable. Set up a retirement plan. You should consider setting up a self employed qualified retirement plan (i.e. SEP IRA) not only for tax purposes but for the same of saving money for your retirement years. If you wish to start with more than $2,000, you can opt for a Keogh plan, which allows you to put away more into tax-deferred savings for your retirement. 

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Employ family members. You can deduct medical expenses for your entire family by employing them legitimately. Don’t forget to deduct half of FICA. Being self-employed, you pay both the employer and employee portions of Social Security tax. You can, however, deduct half of these payments on your 1040 form. If you have any question, or if you have a good tax tip that we failed to mention here, please email me at: [email protected] or call 212.786.3018. ©Copyright 2008 by Brian Zen. All rights reserved. 


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