A lifestyle resource for today's active adult: Live Smart, Live Well, Live Large

Ah, the holidays - a festive time of family visits, holly, delicious food, presents, and tax planning. Yes, Virginia, there is a Santa Claus, but he works for the IRS in the off-season, so let’s see how to avoid giving too much back to Santa.

Year-end planning for 2007 is tougher than usual because of uncertainty about what relief, if any, Congress will provide from the dreaded Alternative Minimum Tax (AMT). Here is a checklist of actions that may save you taxes if you act before year-end.

Flexible Spending Account – If your employer has a flexible spending account, make sure you elect to set aside the maximum you believe you will have in qualifying expenses. Also, don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
Tax Losses – If you have capital losses on investments in non-retirement accounts, consider selling those assets prior to year-end in order to recognize the tax loss on your 2007 return.
Lower Capital Gain Rate in 2008 – In 2008, for those in the 15% regular federal tax bracket, there is a zero tax rate (that’s right….zero) on long-term capital gains. If you qualify, consider postponing a 2007 sale until 2008.
Postpone 2007 Income – If you are self-employed or have any control over when you receive bonuses or other compensation, consider postponing some 4th quarter 2007 income until 2008.
Accelerate 2007 Deductions – To the extent possible, consider accelerating any business or personal itemized deductions into 2007 instead of waiting until 2008. Self-employed individuals should also consider acquiring any needed capital assets, such as furniture or equipment, in 2007 and expensing them under Section 179.
Home Improvements - If you are thinking of making energy saving improvements to your home, consider doing so before year-end in order to qualify for a tax credit that may not be available after 2007.
NC Estimated Tax – If you make state estimated tax payments, consider making your final NC estimated tax payment prior to 12/31/2007, instead of waiting until the 1/15/2008 due date. This will allow you to claim an itemized deduction for this state income tax payment on your 2007 federal return. Caution: If you are subject to AMT in 2007, don’t do this, as AMT will cancel out the benefit of this deduction.
Avoid Tax Penalties – If you are facing potential penalties for underpaying estimated tax, consider increasing withholding prior to year-end in order to avoid or minimize the penalty.
Retirement Contributions – Make sure you are contributing the maximum to your IRA and your employer’s 401(k) in 2007 and review your elections for 2008. Self-employed individuals should consider establishing or contributing to their business retirement plan. IRA contribution limits are $4,000 for 2007 ($5,000 if 50 or older) and $5,000 in 2008 ($6,000 if 50 or older). 401(k) contribution limits are $15,500 for 2007 ($20,500 if 50 or older) and $16,000 in 2008 ($21,000 if 50 or older).
Family Gifts – You can gift up to $12,000 each year to an unlimited number of individuals without any gift tax implications. Note that by splitting their gifts, a husband and wife can double this amount to $24,000.
Kiddie Tax – In 2007 the “kiddie tax” rules apply to kids under age 18; in 2008 they will also ensnare most children age 18 and most full time students age 19 through 23. If your child holds appreciated stock, and isn't in kiddie tax territory this year but will be in 2008, consider selling the stock this year. In many cases this will result in a 5% tax on the gain, instead of 15% if the sale is postponed till next year.
Donating Cars to Charity – If you donate a car to a charity, new rules now limit your charitable deduction to the amount the charity sells the car for.
IRA Charitable Donations - If you are 701/2 or older, and own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, arrange for the gift to be made directly from your IRA.
Social Security Benefits – If you are paying tax on your Social Security benefits, you may be able to reduce or eliminate the tax by rearranging your investments.

Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.