Reduce your 2008 tax bill before 2009

As 2008 draws to a close, there is still time to reduce your 2008 tax bill and plan ahead for 2009. Factors that compound the challenge include the stock market's swoon, the difficult economic climate we're in right now, and the strong possibility that there will be tax changes in the works next year. Below are several potential tax-saving opportunities which may reduce your income tax bill.

NOL Carryback Period: If your business suffers a net operating loss in 2008, you may apply those losses against taxable income going back two tax years. Thus, the loss could be used to reduce taxable income and thus generate tax refunds for tax years as far back as 2006.

Equipment Purchases: If you are in business and purchase equipment, you may make a “Section 179 Election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property.

• For 2008, you may elect to expense up to $250,000 of equipment costs (with a phase-out for purchases in excess of $800,000) if the asset was placed in service during 2008.

• In 2009, these dollar amounts are reduced to $133,000 and $530,000, so 2008 is the year to put property into your business to take advantage of the increased dollar amounts.

• Bonus Depreciation: Taxpayers meeting certain criteria can claim a 50% bonus depreciation allowance for property placed in service after 2007 and before 2009 The original use of the property must begin with the taxpayer after December 31, 2007, and before January 1, 2009. This bonus writeoff generally won't be available next year.

Investments: Realize losses on stock to offset gains on others while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later..
Retirement plans: This is a great time to assess the impact of the stock market on your plan, examine alternative plan choices and revisit financial planning. Consider converting traditional-IRA money invested in beaten-down stocks or mutual funds into Roth IRAs if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2008.

Federal tax underpayment penalties: Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.

Basis increases: If you own an interest in a partnership or S corporation you may need to increase your basis amounts in the entity so you can deduct a loss from it for this year.
Prepay Expenses: Consider using a credit card to prepay expenses that can generate deductions for this year.

Flexible Spending Accounts: Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

Health Savings Accounts: If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2008.

Energy saving improvements: If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, postpone your move until 2009. A credit of up to $500 may be available for such improvements if made next year (but not this year).

Energy generating equipment: Substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credits are available whether you spend the money this year or next, but if you're installing solar electric property, and will be spending more than $6,667, the credit will be larger for expenses made in 2009 rather than 2008.

Full or Partial Owners of Foreign Corporations: Avoid the 2009 tax penalty

Generally ownership of 10% or more of the combined voting power of a foreign corporation, plus the existence of certain other facts requires you to file Form 5471. Recently the IRS announced that they will begin to automatically assert penalties for late filed Forms 5471 and most likely, forms 5471 that have not been filed and are discovered by the IRS to be delinquent beginning January 1, 2009.

Failure to timely file Form 5471 can lead to a few substantial penalties, the minimum being $10,000 per year for each year the form is late or delinquent. Penalties can be imposed within three years of the form being filed, not three years from the date the underlying income tax return is filed. Consequently, a penalty for a Form 5471 that has never been filed can be assessed at any time by the IRS. Historically, the assertion of penalties for delinquent, or late-filed, returns was made at the discretion of the IRS but, as of January 1, 2009, the IRS will begin to automatically assert these penalties.

To reduce the chance that these automatic penalties will apply to you, it is imperative that you review your records and work with us before the end of calendar 2008 so that we can file any delinquent Forms 5471 by that date. Because penalties will not be automatically assessed for late-filed Forms 5471 if they are submitted before January 1, 2009, there is less risk that the penalty will be assessed, and thus ultimately imposed, if a late-filed Form 5471 is submitted by December 31, 2008, rather than after that date.

Call Goldstein Lewin & Co. at 561-994-5050. We’ll help you determine which tax strategies will work best for you.