Best strategies for the rest of the year… and beyond

Now is a great time to take steps to minimize your 2008 tax bill. Enough of the year has passed to choose which planning moves will be the most valuable, and enough time remains before year-end to act on them. Consider these smart tax-saving strategies


To get the most tax-free income from your investment portfolio…

  • Avoid paying tax on capital gains. People in the 10% and 15% federal income tax brackets can receive long-term capital gains and qualified dividends free from federal tax in 2008.
  • For 2008, the 10% and 15% brackets cover taxable income up to $65,100 on a joint tax return and $32,550 on a single return. If your income is higher than this, consider shifting investments to other family members who can take advantage of it — such as adult children or retired parents — to reduce the family tax bill.

    If you make a gift of…

  • Stock that pays qualified dividends, the gift recipient in the 10% or 15% bracket can receive the dividends tax-free.
  • Capital gains property that you have held for more than one year, the recipient in the 10% or 15% tax bracket can sell the property using the long-term holding period carried over from you and pay no tax on the gains.
  • Caution: Beware of the new “kiddie tax” rules in 2008 — investment income of children under age 19 and dependent children under age 24 who are full-time students is taxed at their parents’ tax rate. Download IRS Publication 553, Highlights of 2007 Tax Changes from or call 800-TAX-FORM.

  • Match gains and losses. First, check to see if you have capital losses from previous years that you can carry forward into 2008. Then tally up your realized gains and losses to date this year, plus any unrealized gains and losses in your portfolio that you could take.
  • Goal: Match gains and losses so that gains are taken tax-free. If you have net losses to date, take gains that offset them. If you have net gains to date, take losses that will offset them.

    Extra benefit: Regularly taking losses to offset gains also gets you into the habit of continually reviewing your investment portfolio to prune out the disappointments in a timely manner — and so may increase your investment returns.


    Gifts of valuable assets made to family members also can cut your taxable income and save taxes by reducing the size of your estate to lower your future estate tax bill.

    Making such gifts as early in the year as possible maximizes the tax benefits by shifting more income and, potentially, more appreciation than if the gifts are made later.

    Rules: Gifts of up to $12,000 per recipient annually are exempt from gift tax. This limit is $24,000 when the gift is made jointly by a married couple.

    In addition, every person can make up to $1 million of lifetime gifts (over the $12,000 annual exempt amount) free of gift tax. These lifetime gifts reduce the amount of an estate that will be exempt from estate tax (currently $2 million).

    Even if you will owe estate tax, these gifts can save tax by removing appreciation on assets from your estate, as well as by reducing current income tax.


    The sooner you place funds in a tax-favored retirement account, the more tax-favored investment returns the account may earn during the year. So don’t wait until the last minute to make an IRA contribution.

    Safety: If you contribute more to an IRA than you are eligible to — say, due to an unexpected change in your circumstances that occurs later in the year (such as an increase in your income level or a change in your employment status) — you can withdraw the excess amount by April 15 of the following year without penalty.

    If you participate in another kind of retirement plan to which you can make contributions early in the year, such as a Keogh plan for the self-employed, make contributions to it as well. Check your plan’s rules.


    Many people make charitable gifts with cash when they own appreciated stock or mutual fund shares upon which they will someday incur taxable gain.

    Better: Rather than cash, donate long-term-gain securities to a charity. You get a deduction for the securities’ full market value and avoid paying capital gains tax on the appreciation in them.


    Congress has created a host of tax breaks to help pay for education — including adult education.

    Examples: Business expense deduction for work-related education… student loan interest deduction… Hope credit… Lifetime Learning tax credit… Section 529 tax-favored college savings… Coverdell Education Savings Accounts… tax-free interest from Series EE and Series I savings bonds when the interest is used for tuition and fees at a higher-education institution for yourself, your spouse or a dependent.

    Snags: Each benefit has its own rules, including income limits for those eligible to use them… and using one benefit may preclude using another.

    Best: Examine all the options available to you, and select the best for your situation. Find them all explained in IRS Publication 970, Tax Benefits for Education.


    Most people focus on managing federal taxes, but state taxes can be costly, too — even more costly than federal taxes for many. State taxes include not only income taxes but also property taxes, sales taxes, inheritance taxes and others. Don’t overlook opportunities to cut these taxes. Examples…

  • If your home or other real estate you own has recently declined in value, you may be able to have the property tax assessment on it reduced. Check the assessment appeal rules in your locality.
  • State tax rules create many specific local tax breaks — such as income tax and property tax exemptions for seniors, tax deductions for medical costs and sales tax exemptions for specific items. There’s no way to learn of these except by checking local rules, so do so with an expert.
  • Moving opportunity: Before moving from one state to another, check the tax effects. For instance, you might want to take capital gains on securities before or after the move, while you are living in the state that imposes the least tax.


    It’s basic but important — the better your record keeping, the easier it will be to find tax-saving strategies… prepare your tax return… and defend your deductions and other tax-saving strategies during an IRS audit.

    Improve your record keeping by using one of the leading financial computer programs, such as Intuit’s Quicken or Microsoft Money Plus, to record all of your investment activities and expenditures that may affect taxes.

    Important: Whenever you sell an item, you’ll need to know its “tax basis” — its cost to you for tax purposes — from which a gain or a loss will be determined.

    Trap: People often lack tax basis records for items received as gifts or by inheritance or that have been held for many years. But without a record of basis, the IRS may treat all of the proceeds from a sale as a taxable gain.

    If you received an item as a gift, you may need to learn the gift giver’s basis in it so that you can calculate your own basis. If you received an item by bequest, you may need information from the executor of the estate that left it to you. Collect such records now while you have time and while the people who can give them to you are still available.

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