Investors Seek Shelter From Tax Storm

Many of the clients of Kathy Burch, have been hit hard by the stock market, seeing their investment accounts decrease by as much as one-third.
In order to offset some of these losses, they are taking advantage of tax breaks this year that will enable them to use their tax savings to help recover some of their portfolios, said Burch, JD CPA MS, Horizon CPAs and Consultants PLC, 5555 E. 71st St.
There is a tax deduction under Code Section 179 that allows businesses to deduct up to $250,000 of the cost of assets placed into service this year. Business owners can borrow the money to buy these assets and still take the tax deduction with no out of pocket cost this year.
“For a business owner, that could mean a tax savings of up to $87,500 this year,” said Burch. “Also, contributing to a 401(k) retirement plan for a business owner could save that business owner up to $16,100 in tax this year.”
The owner would have until they filed their tax return next year to make most, if not all, of the contribution. The plan would need to be established before the end of the year in most cases.
The top two individual income brackets are expected to return to their 1990 levels of 36 percent and 39.6 percent, said Burch.
Those are 3 percent and 4.6 percent increases respectively.
Obama Tax Plan
“In addition, the Obama-Biden tax plan proposes raising the long-term capital gains rates for people in the top two tax brackets to 20 percent,” she said. “This is a 5 percent increase.”
The next administration also proposes raising the qualified dividend income tax rate to 20 percent from the current 15 percent rate.
“Our clients want to know what they should do before the end of this year to protect their hard earned income from being subject to more taxes,” Burch said. “Many of our clients are self-employed business owners that file as partnerships or S Corporations and these are the taxpayers being targeted with these higher rates.”
Burch tells investors who expect to have taxable income of at least $250,000 in 2009 to file jointly with their spouse and “engage in some year-end strategic tax planning” with a CPA.
“Long-term capital gains could be taxed at a 5 percent lower tax rate this year vs. next year. Investors may not want to wait until next year to sell securities with long-term capital gains,” Burch said.
However, capital losses may be worth 5 percent more next year, so waiting until next year to realize capital losses that could offset capital gains may be a sound strategic plan, she said. Qualified dividends will continue to be taxed at a lower rate than ordinary income so it still makes sense to look at investments and determine if some investments producing interest income should be moved to investments producing qualified dividend income since the tax spread on these investments could still be as much as 19.6 percent.
In 2001 and 2003 President George W. Bush proposed, and Congress passed, a series of tax cuts that will expire by Jan. 1, 2011, if no new legislation is passed.
One tax cut that will expire is the lower rate on qualified dividends. They will be taxed at ordinary income rates beginning in 2011.
“This means all taxpayers that have qualified dividend income will pay significantly more tax,” Burch said. “Investors can invest money in retirement accounts that will be sheltered from these higher tax rates and take a current income tax deduction for the contribution now to protect their wealth and savings.”
All taxpayers qualifying for a Roth IRA should consider contributing to it now for 2008 to get as much money as possible into tax sheltered accounts, she said.
There are also numerous types of investments that are a great buy now and also have tax favored income, Burch said. For example, most Oklahoma bonds are exempt from federal and state income tax and they are paying interest rates well above the federal reserve rate. The after-tax return on some of these are as high as 9 percent.
“Also, individuals with traditional individual retirement accounts will want to consider whether they should convert those accounts to Roth IRA accounts before the end of the year while the market is down and pay a lower tax on the conversion,” she said.

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