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It’s tax season again, but it may
not be business as usual for fund investors. There are new
tax regulations, along with added perks for some
taxpayers, so this year more than ever, it’s important
to consult with your tax adviser to be sure you’re
getting the tax breaks available to you. As a fund
investor, you may find that these tough economic times
require a new way of thinking about taxes and planning
your investments. Points to consider this year:
Possible
Reprieve
for Retirees
If you’re in retirement, you may be taking a
double whammy, because in addition to the chances that
your portfolio’s overall balance went down, you also may
be taking distributions, which doesn’t allow your
portfolio the time it needs to recover.
With the market losses of last year, the last thing
on your mind may be capital gains, however, some investors
may have sold long-held investments at a gain. Even if
your AGI is higher than $65,100, which is the start of the
25% tax bracket for those married-filing-jointly ($32,550
for single filers), tax deductions and credits may bring
your taxable income into the range to qualify for at least
a portion of the zero rate. Even if the gain itself moves
you into the 25% bracket, there could still be a portion
taxed at zero percent. What
to Do If You Withdrew Retirement Money No doubt some taxpayers
last year found themselves forced to pull money earlier
than expected from their retirement plans. Be sure to
report that as income on your tax return. Your retirement
plan administrator will send you and the IRS a Form
1099-R. It will be your responsibility to
report that as income on your return using a
separate form to calculate the tax owed. Generally, early
withdrawals are assessed a 10% penalty, though exceptions
apply for certain hardships. See
IRS publication 575, "Tax on Early
Distributions." Reporting
Your Child's Investment Income Investment income or other
unearned income received by dependent children 18 and
younger is taxed at varying rates. For 2008, the rules
expanded to include dependent, full-time students under 24
years of age. For this year, $900 or less exempt from
income tax. For amounts between $901 and $1,800, it is
taxed at the child’s rate. If the amount is $1,801 or
more, it is taxed at the parents’ rate if it is ordinary
income or a maximum of 15% if it is long-term capital
gains.
Due to the complexities and options for reporting
your child's investment income, refer to IRS Publication
929, Rules for Children and Dependents and Form
8814, Parents Election to Report Child's Interest and
Dividends. See your tax advisor for guidance. Don’t
Neglect to Fund an IRA for 2008
In the current economic environment, it may be
difficult to come up with the cash for your 2008
contribution if you haven’t already made it or if you
don’t have automatic investments made into an IRA
account. Making your contribution is more important than
ever to help offset market losses and take advantage of
low share prices. If you are eligible for a deduction on
your 2008 return for a Traditional IRA, that’s reason
enough to contribute for 2008. Traditional
and Roth IRA contributions
- 2008 contributions can be made until April 15, 2009.
Contributions made after January 1, 2009, are credited for
2008 only if you request it. The
contribution limits for Traditional and Roth IRAs for 2008
is $5,000, or up to $6,000 if you turned 50 before January
1, 2009. SEP,
SARSEP, and SIMPLE-IRA contributions
- 2008 employer contributions can be made until the
employer's 2008 tax-filing deadline (including any
extensions). Contributions received after January 1, 2009,
will appear on Form 5498 for 2009, which will be sent in
2010. Take
Advantage of Tax Cuts While You Can
Tax Cuts from 2001 are set to expire in 2010 unless
Congress takes further action to extend them. If you’re
eligible, make sure to get the most benefit while you
still can. Previous phase outs for higher earners to take
itemized deductions and personal exemptions were slowly
eliminated starting in 2006. For 2008, higher-income
earners can take advantage of itemized deduction and
personal exemptions by one-third the amount in effect
before the tax cuts. By 2010, these taxpayers will enjoy
the perks with no reduction at all. You
can write off up to $4,000 for college costs without
having to itemize deductions. This is even more attractive
this year since the standard deduction has been raised.
This deduction applies to undergraduate and graduate
expenses for yourself, your dependents, and students
don’t have to study full-time to deduct the costs. In
addition, you can claim eligible expenses from the first
three months of 2009 on your 2008 return if you prepaid
them last year. One thing to keep in mind with this
deduction is that it applies only to payments for tuition
and fees — not room, board and book costs.
The Alternative Minimum Tax (AMT) was originally
designed to prevent a small number of high-income
taxpayers from totally avoiding federal income taxes due
to excessive use of tax deductions and credits. However,
many taxpayers who exercised an Incentive Stock Option
(ISO) got hit with unexpected AMT bills. In 2008, Congress
took steps to prevent tens of millions from being caught
by the AMT. This includes raising the AMT income-exemption
amount for 2008 to $46,200 for most singles or $69,950 for
married couples filing jointly or a qualifying widow.
Thanks to the new law, those exercising an ISO will
no longer owe the tax. Even if you had an unpaid liability
from an ISO exercised prior to 2008, it was abated by the
law, so you can wipe that bill clean. Another measure of
Congress’ action was to speed up the process or taking a
credit against regular tax for previous AMT bills. Consult
your tax advisor or visit the IRS website. |
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