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December 2008


by Andrew D. Schwartz, CPA

According to The Ultimate Book of Useless Information by Noel Botham, "a trilemma is a dilemma with a third alternative."  While I wasn't actually able to find this word listed in any of the dictionaries in my house, year-end tax planning for 2008 can best be described as a trilemma.

Why is tax planning so complicated this year?  Based on Obama's campaign promises, Democrats taking control of both Houses of Congress, and a US debt figure of ten trillion dollars and growing, there is a good chance that individual tax rates are on the rise for 2009 and beyond.

Here are some of the tax increases still represented as part of Barack Obama’s Comprehensive Tax Plan found on his site,

  • Ordinary Income: The top two income tax brackets would return to their 1990’s levels of 36% and 39.6%. All other tax brackets would remain as they are today. Obama would also restore the 1990’s levels for the personal exemption and itemized deduction phase-outs [known as the Stealth Tax.]

  • Capital Gains: Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent.  [That's a 33% increase over today's top rate of 15 percent.]

  • Dividends: The top dividends rate for people making over $250,000 would be set at 20 percent [versus today's top rate of 15%.]  Dividends will not return to being taxed at ordinary income tax rates.

  • Social Security Tax:  As part of a bipartisan plan that would be phased in over many years, they will ask those making over $250,000 to contribute a bit more to Social Security to keep it sound.  Obama does not support uncapping the full payroll tax of 12.4 percent rate. Instead, he and Joe Biden are considering plans that would ask those making over $250,000 to pay in the range of 2 to 4 percent more in total (combined employer and employee).

The Trilemma

The higher the level of uncertainty, the more difficult planning becomes.  Since no one knows for sure what will happen with the Tax Code in 2009, how should you handle your year-end tax planning?

Option 1: Take The Traditional Approach

Also known as the Bird In The Hand Approach, with the Traditional Approach you do whatever you can to save taxes today.  Prior to December 31st, take advantage of any and all tax-saving opportunities that are available to you.  You can find a list of year-end tax planning strategies in the third article of this month's newsletter.

What happens If tax rates jump up next year?  So be it.  Next year is when you'll figure out how to minimize your 2009 tax burden. 

Option 2:  Plan For Higher Taxes Next Year

If you think your tax rates are on the rise, then you may opt for Delayed Gratification.  Even though foregoing some common year-end tax breaks will increase your taxes this year, benefiting from those breaks in next year's higher taxed environment might ultimately help you minimize your tax burden over this two-year period.

If you'd like to plan for higher taxes next year, accelerate taking income into 2008 if possible, and also hold off making your January 2009 mortgage payment and finalizing your 2008 charitable donations until after December 31st. 

Option 3: Worry About The Alternative Minimum Tax

Nothing ruins good tax planning like the AMT.  One positive spin to higher taxes is that fewer people may find themselves subject to this tax.  As part of your year-end tax planning for 2008, don't overlook the impact of the AMT. 

Remember, certain expenses such as state income taxes, real estate taxes, personal exemptions, miscellaneous itemized deduction, certain Home Equity Line of Credit interest, and a portion of allowable medical expenses are not allowable when calculating the AMT.

  Counting the Days

January 20th is Inauguration Day.  That means there are 51 days before the clock starts ticking on Obama's all important first 100 days as President.  By working through the math, and adding 151 days to the December 1st date of this newsletter, that bring us straight to April 30th.

Assuming Obama is able to push through some of his tax agenda during his first 100 days in office, it could be as late as April 30th before you finally have a clear picture of the scope of the tax changes affecting you.  This uncertainty is at the root of the trilemma surrounding  your year-end tax planning for 2008.



by Andrew D. Schwartz, CPA

Good news for taxpayers.  Congress managed to extend relief from the dreaded Alternative Minimum Tax through 2008 as part of the 2008 Financial Bailout and Tax Package enacted on October 3, 2008. Each year since 2001, Congress has provided for a temporary fix to the AMT.   Had nothing been done about the AMT, the number of taxpayers paying this tax was expected to jump to more than 20 million in 2008.

What is the AMT?  The AMT is a parallel tax system that was instituted in the late 1960's to ensure that high-income taxpayers pay at least a minimum amount of taxes.  Thirty-nine years ago, the tax laws were much different then today's tax code.  Back then, the top tax bracket was 70% or higher, and deductions, credits, and other tax breaks were abundant.  As a general rule, only high-income taxpayers were hit by this tax.

In recent years, however, more and more middle-income taxpayers are finding themselves paying this tax.  Over the years, the top bracket has been cut in half to 35% while the upper limit for each of the tax brackets has increased substantially because of inflation.  Even so, the AMT rates have held steady at 26% and 28%, and the allowable AMT exemption has not kept pace with inflation over this time period.

Increased Exemption

What is causing this AMT catastrophe each year?  The biggest culprit is the AMT exemption that you're allowed to claim.  The purpose of this exemption is to protect middle-income taxpayers from paying the AMT. 

As part of this one-year fix, the AMT exemption for married couples has been increased to $69,950 for 2008, up from $66,250 allowed for 2007.  Had Congress not acted, the AMT exemption was slated to be cut to just $45,000. The AMT exemption for single individuals is now set at $46,200, up from the pre-fix amount of $33,750.

Remember, the purpose of this exemption is to protect middle-income taxpayers from paying the AMT.  This increase of $3,700 in the AMT exemption should help keep even more taxpayers from being hit by this tax in 2008. 



by Andrew D. Schwartz, CPA

With Obama taking office in January and the Democrats taking control of both Houses of Congress, no one knows what will happen with the tax rates in 2009.  For that reason, we split our annual year-end tax planning advice into two groups - Definite & Maybe:


Let's start with those strategies that make sense no matter what happens with the Tax Code next year:

  • Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year you can put up to $15,500 into your 401(k) or 403(b) plan.  Anyone 50 or older by December 31st can put away an additional $5,000.  If you’re self-employed, consider setting up a Solo 401(k) by 12/31.  Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.

  • Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.

  • Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income this year and you itemize.

  • Fully fund your child's or grandchild's 529 account up to the annual gift limit of $12,000 per year per donee, or $60k over a five year period.


Now let's review some year end strategies that may not make sense if you feel that your income tax rates will increase in 2009.  However, if you think your income will take a big hit next year due to the current economic mess, then these strategies would still make a lot of sense to you.  That's why they are in the Maybe bucket.

  • Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds).  Excess losses can then be used to offset up to $3,000 of wages and other income, with any remaining losses carried over to next year.  Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.  Keep in mind that Obama has discussed increasing the maximum Capital Gains rate from 15% to 20%.

  • Send in your January, 2009 mortgage payment early enough so it will be processed prior to 12/31/08.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.  If tax rates increase, however, you might be better off delaying this mortgage payment until January.

  • Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize.  Don’t forget to get a receipt.  And you should make a list of each item donated, since only donations of clothing and household items in "good condition or better" qualify for a deduction.  (Please download our Non-Cash Contribution Worksheet  to help you determine the value of your donated items.)  Higher tax rates in 2009 might mean a larger tax break if you hold off making this donation until January.

  • For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2009.  And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.  The higher the anticipated tax rates in 2009, the more taxes you might save by delaying your contributions to January.

  • Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax. Or, hold off making these types of payments until after December 31st if that will give you a bigger bang for the buck.

For your final step, evaluate whether you'll save any taxes by postponing 2008 income or deductions into 2009 or by accelerating 2009 income or deductions into 2008.  And now is the time to contact your tax preparer or one of the MDTAXES CPAs with any questions you have about year-end tax planning strategies.




Income Taxes

Saving and Investing




  • 4th quarter state estimates should be paid by 12/31 for people who itemize their deductions and won't be hit by the AMT.
  • Keogh plans and Solo 401(k)'s must be established by 12/31
  • 529 Plans must be funded by 12/31 to take full advantage of this year's gift limit of $12,000.
  • Last chance to maximize annual contributions to your 401(k) or 403(b) plan of up to $15,500, ($20,500 if 50 or older).


2008 & 2009 TAX FACTS

  • For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2008, the personal exemption is $3,500. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $102,000 for 2008, increasing to $106,800 for 2009.
  • The standard mileage rate is $.585 per business mile as of July 1, 2008, up from $.505 per mile for the first six months of 2008.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2008, increasing to $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account this year and an extra $5,500 next year.
  • The maximum annual contribution to your IRA is $5,000 for 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 


You're Invited to Attend Our Complimentary Presentation on:

Tax and Basic Financial Planning Issues Applicable to Young Healthcare Professionals

Here is a list of cities where the presentation will be held:

Boston - 1/22/09

For more information, click on the name of the city.


This Month's Topics

What A Trilemma!

One More Year of AMT Relief

2008 Year-End Tax Planning Is A Definite Maybe

The FICA Refund for Medical Residents 

2008 & 2009 Tax Facts

Tax and Financial Planning Calendar for December 2008


Browse our index of previous months' newsletter topics

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May 2007 - District court ordered to vacate ruling that medical residents are not exempt from the FICA Tax.

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

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