Estate Planning Bits

Changes in tax rates may work to your advantage – stay tuned!

Although the reduced rate has been extended through the year 2010, it is important to note that the lower tax rate applicable to Capital Gains and certain qualifying dividend income of fifteen (15%) percent was scheduled to be phased out at the end of 2008. However, with the shift in the congressional landscape, the growth of the deficit, the pressure on Social Security, and the cost of the war in Iraq, there is a strong possibility that the issue of those tax rates, or for that matter, all tax rates in general, will be revisited sooner rather than later. As such, taking advantage of the current rate structure should be borne in mind with your income timing and related investment plans and planning.

By: Bruce M. Fogel, Esquire

Timing and postponing your retirement contributions until you have the funds available

Many of you will find that you have the opportunity to establish retirement plans (other than an IRA) in connection with your work and/or the business that you operate. In those situations, there are several types of plans that are available to you.

It is certainly be prudent to discuss the options with your financial advisor to determine which one of them might be most efficient and cost effective, in order to accomplish as many of your current and future goals and purposes as possible. However, you must establish the plan before December 31st to receive the tax benefits. If you do this, you put yourself in a position of having the option of determining whether you can afford to make a contribution or whether you prefer to postpone making the actual contribution until the final filing date for that year’s income tax return.

Unlike an IRA contribution which must be paid by April 15th in order to claim the deduction, contributions to the other types of retirement plans need only be made by the filing due date of your income tax return, including any qualifying extension. Thus, if you plan to make a contribution but did not have the money as of April 15th – the date by which you would still need to pay your income taxes, you could always calculate your proposed taxes utilizing that contribution amount, but postpone the actual time when you have make the retirement plan contribution, up to the last filing date for your return, which is October 15th. In this way, you can give yourself up to 6 months of additional time to accumulate the necessary funds to make the contribution!

But the key is that you must establish the plan within the calendar year of the return you want to deposit the funds toward. This is a good time to establish your fund for 2007. That way you won’t get caught at year end.

By: Bruce M. Fogel, Esquire

Charitable use of your IRA – a tax-planning strategy

For the calendar years 2006 and 2007 taxpayers who are over 70 ½ will be eligible to use their IRAs to make charitable contributions directly to a charity without having to report that distribution as income on either their Federal and/or Massachusetts income tax returns. The benefit of this opportunity is the ability to not increase your Adjusted Gross Income with all of the various tax calculation implications. At the same time you can avoid having to include it on your Massachusetts income tax return, where you would otherwise not have been entitled to claim any charitable contribution.

This is a great strategy to include in your 2007 tax planning.

By: Bruce M. Fogel, Esquire

An ugly middle-class trap - Alternative Minimum Tax (AMT)

Probably the most annoying example of a good concept running amuck is the Alternative Minimum Tax. This is a tax calculation established by the Internal Revenue Code some years ago to try to make sure that higher income individuals would pay a tax despite their best efforts using otherwise available tax planning strategies.

Unfortunately, this tax, intended primarily applicable to the wealthy, has, by virtue of its construction, caught more and more, so-called, middle class taxpayers. Those people who happen to have significant deductions in the area of State, Personal Tax and/or Real Estate Taxes and/or large Capital Gains are the most vulnerable. This AMT concept makes planning much more difficult and potentially dangerous if it is not properly contemplated.

Those people who have incomes in excess of approximately $75,000.00, with large deductions for state and local income taxes and/or other write-offs and exemptions, could find themselves caught in this AMT trap. The AMT calculates your tax liability by using a separate exemption threshold, without allowing the various deductions noted above and then compares your regular tax to the AMT tax. Any difference is then added to your so-called regular tax in order to determine your final tax obligation.

Thus, it becomes very important to consider the AMT early in the year and regularly throughout the year if your income is expected to be $75,000 or more.

By: Bruce M. Fogel, Esquire