Not Too Late To Make Moves: Some Year-End Tax Planning Guidelines

Editor’s note: Randy Robason is based in Charlotte and is Grant Thornton’s Carolinas Tax Practice Leader.
________________________________________________________________________________________As another year nears an end, executives have an excellent opportunity to examine their tax situation and consider ways to improve their financial and business health. Outlined below are year-end tax planning guidelines to help you review your company’s financial positions and tax structures before entering the new year. And taking advantage of tax saving opportunities now may pay significant dividends in the future.

1) Consider the Alternative Minimum Tax (AMT) when selling assets — Always consider how significant transactions, such as selling assets or exercising incentive stock options, may affect AMT liability. Also consider it in your year-end tax planning. Knowing where you stand may enable you to adjust your income and deductions to minimize the AMT.

2) Look at total return when investing in stock — With the tax rates for qualifying dividends and long-term capital gains now the same, it may be easier to focus on total return when investing in stock. Keep in mind, though, you have only a three-year time horizon remaining for the 15 percent rate (unless it’s extended by Congress).

3) Don’t forget above-the-line deductions — “Above-the-line” deductions are those expenses you can subtract from your income in determining your Adjusted Gross Income (AGI). Because AGI affects your ability to enjoy numerous tax breaks to their fullest, above-the-line deductions are especially beneficial. Examples include Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, moving expenses, self-employed health insurance costs and alimony payments.

4) Contribute appreciated stock to charity — Contributions of appreciated stock can be especially effective. Along with receiving an income tax deduction and avoiding the capital gains tax, you also remove that asset from your estate, thereby reducing your potential estate tax burden.

5) Shift appreciating investments to your children — Children who are 14 and older can sell capital gain property and pay tax at rates as low as 5 percent (zero in 2008), depending on their income. In 2005, you and your spouse, together, can give up to $22,000 of assets to each of your children (or grandchildren) … free of federal gift tax … without using any of your $1 million lifetime gift tax exemptions. This strategy might not work for gifts to younger children because the “kiddie” tax applies. Unearned income beyond $1,600 is taxed at their parents’ marginal rate unless the appreciating assets are sold after the children are 14 or older.

6) Don’t count out the ESA — Think a Coverdell Education Savings Account (ESA) is too limited? Remember that, although 529 plans give you more bang for your buck, ESAs can pay for elementary and secondary education expenses. Also, you have more investment options and control with an ESA. Finally, you have until April 15 of the following year to make the contribution, so you have plenty of time to make up your mind.

7) Nondeductible IRA contributions can add up too — If your income is too high for a deductible IRA or a Roth IRA, consider a nondeductible IRA contribution. The earnings can build up on a tax-deferred basis, giving some shelter on investment income recognition while you put away money for retirement. The nondeductible contribution amount is still limited to the lesser of your earned income or the IRA contribution limit ($4,000 for 2005).

8) Consider selling stocks with a loss position — To the extent a taxpayer has a capital gain position for the year, he or she should consider selling stocks with a loss position to offset capital gains and up to $3,000 of ordinary income. To the extent a taxpayer has a capital loss in excess of $3,000 for the year, he or she may want to consider selling stocks that will generate capital gain in excess of $3,000 to offset the capital gain. This strategy, however, should be considered in light the lower capital gains tax rates that are currently set to expire after December 31, 2008.

9) Maximize 401(k) contributions — The 401(k) contribution limit for 2005 is $14,000. For taxpayers 50 years of age and over, an additional “catch-up” contribution of $4,000 is allowed under legislation enacted in 2001. To the extent taxpayers have not yet reached their 2005 contribution limits, they may want to consider increasing their payroll contributions for the remaining payroll periods in 2005. Taxpayers should keep in mind that for 2006, the 401(k) contribution limit is $15,000 and the additional “catch-up” contribution is $5,000.
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Randy Robason is based in Charlotte and is Grant Thornton’s Carolinas Tax Practice Leader. Grant Thornton LLP is the U.S. member firm of Grant Thornton International, a global accounting, tax and business advisory organization with regional offices in Raleigh, Charlotte, Greensboro, and Columbia, SC. Kevin Beasley is the Tax Partner in Grant Thornton’s Raleigh office and can be reached at Kevin.Beasley@GT.com.)