The new year is just two weeks away, but there is still time for a few savvy moves to trim your tax bill, especially when it comes to spreading some holiday cheer to your favourite charities.
One of the biggest tax changes this year is that the Pension Protection Act of 2006, signed into law in August, included reforms affecting charitable planning and individual retirement accounts. Now taxpayers who are 70½ and older can in 2006 and 2007 give away as much as $100,000 from their IRA directly to qualified charities without triggering federal income taxes.
Sam Petrucci, a vice-president in the wealth planning group at Credit Suisse Private Banking USA, notes that these assets cannot be transferred to a donor advised fund, supporting organisation, charitable split-interest trust or private non-operating foundation to avoid income tax.
While this break is expected to be a boon for public charities, the PPA contained bad news for big game hunters thinking about donating taxidermy – safaris are no longer tax deductible.
According to JPMorgan Private Bank, hunters who mounted the head of an animal they shot and donated the trophy to a charity could previously deduct the cost of the mounted herd and the cost of the game hunting safari. Under the new rule, only the cost of the taxidermy is deductible.
There are other options to help lower your tax bill, including donating appreciated assets, such as stock. Matthew Brady, a managing director with Lehman Brothers’ wealth advisory group in San Francisco, says: “Those with restricted stock need to start that process immediately to effectuate the transfer by year-end.”
Another point to bear in mind is that the last trade date to realise a gain or loss for the year is December 29.
“The stock market has appreciated significantly this year, and there are a number of people facing capital gains realisations. So if there are stock and bond positions that have shown a loss there is a significant benefit to realising that loss this year,” Mr Brady says.
He notes that among the people who are affected are those who have sold art work at a profit, because it is a capital gain item. “If those people have capital losses to realise, it would be very beneficial to do so this year as the tax rate that applies to sales of art is significantly higher than the rate that applies to long-term gains on securities –
28 per cent at the federal level, while the long-term capital rate gain for securities is 15 per cent.”
No year-end tax strategy would be complete without considering the alternative minimum tax (AMT), intended to apply to the rich but increasingly imposed on the middle class.
“Year-end is a time to evaluate whether you’re going to be in the AMT and what items might be deductible this year – for example, state taxes, which can provide a tax benefit if paid by the end of the year,” says Mr Brady. “For those who can’t escape it, there are ways to take advantage by year-end.”
The classic example, he adds, is that if you have stock options and are thinking of exercising them next year anyway, do it this year as you face a lower tax rate. The top AMT rate is 28 per cent versus 35 per cent for the regular tax.