It is Year End Tax Planning Time

There is only one month left until the end of the year. It is now time to buy a copy of Turbotax or Taxcut and to work out how much you will owe in your taxes. I just downloaded my copy of Taxcut 2007 and have started to enter estimates into it to find out what my AGI and MAGI will be. This kind of tax estimation becomes important as your income gets close to $100,000 a year and it becomes even more important as your income hits $150,000 a year (all numbers I use are for married filing jointly).

Here are some important numbers to think about:

  • Above $100,000 you lose the ability to convert a normal IRA to a Roth IRA. If you have already done that this year you want to make sure your MAGI stays under $100,000, otherwise you will have to recharacterize the converted Roth IRA into a normal IRA.
  • Between $100,000 and $150,000 you start to lose the active rental real estate owner loss deduction. This is a big one if you own rental real estate, as depreciation charges will usually give you a taxable loss even if you are cash flow positive.
  • Above $150,000 you start to lose the ability to contribute to a Roth IRA
  • Above $150,000 if you have few itemized deductions and above $100,000 if you have many, you run the risk of getting hit with the AMT.

Tax planning should be year-round. I keep a spreadsheet for that purpose before the tax programs become available. But now is crunch time and it will soon be too late to adjust your income. The recent stock and bond market turmoil gives ample opportunity to harvest taxable losses. While you need to wait 31 days to buy back any sold stock you can buy a broad-market ETF to maintain your market exposure in the meantime. If what you sold was not a broad-market ETF you run almost no risk of the IRS questioning your actions.

If your income is too high this year and you own rental real estate you bought in the last couple years, you could choose to sell it off at a loss. The bad real estate market has already reduced the value of your holding so why not reap the tax benefits of a realized loss?

Disclosure: I am not an attorney or accountant or tax professional. These are just my opinions and not individualized advice. Please consult a CPA or tax attorney for tax advice.

Leave a Reply

Your email address will not be published.

Please complete the formula below to prove that you are human * Time limit is exhausted. Please reload CAPTCHA.

This site uses Akismet to reduce spam. Learn how your comment data is processed.