Text size:

Preparing for likely tax hikes in 2009

Lynn Brenner | Family Finance

September 7, 2008

I've been reading predictions that taxes are likely to rise no matter who wins the presidential election. If that's true, is there any year-end tax planning I should be doing? I'm 61, and I earn $175,000 a year. My portfolio (mostly mutual funds) is worth about $1.3 million.

- B.S. via e-mail

Experts say tax rates are likely to rise for wealthier Americans but that they probably won't go up at your income level. However, there are still sensible tax-planning steps you should consider taking before the end of this year.

Barack Obama has said he won't raise the taxes of individuals who earn less than $200,000 or of joint filers who earn less than $250,000. John McCain says he won't raise taxes at all.

Lynn Brenner Bio | E-mail | Recent columns

But come January, the new administration and Congress will face a ballooning federal deficit, revenues that are shrinking because the economy is weak and new expenses that may include an enormously costly bailout of mortgage lenders Fannie Mae and Freddie Mac. For all these reasons, tax professionals and political observers think taxes are likely to go up whoever is elected, says Bob D. Scharin, senior tax analyst from the Tax & Accounting business of Thomson Reuters in Manhattan. (Bear in mind that a tax increase wouldn't affect assets in tax-deferred retirement accounts.)

Obviously, you should consult a tax professional about your specific situation. But here are some ideas for you and other readers to think about:

With the stock market down, 2008 is a good year to harvest losses by selling the underperforming investments in your taxable accounts, says Joel Isaacson, a Manhattan financial planner. You can use the resulting capital losses to offset taxes on your capital gains. Any losses you don't use in 2008 can be carried over and used in future years, when tax rates may be higher.

You can also use your realized capital losses to offset taxes on up to $3,000 of ordinary income every year.

You may have more unrealized losses than you know. "Perhaps you put $50,000 into a fund 10 years ago and now it's worth $100,000," Isaacson says. "That looks good. But if you add back the dividends you've earned, maybe your cost basis in the fund is actually $125,000. You could sell it and get a big tax loss."

If you think this fund is a good long-term investment, you can buy it back, but you must wait 31 days to do so, or you forfeit the tax loss. In the meantime, you can put your money in a no-load fund with similar holdings.

And if you think your tax rates will rise next year, consider pulling income into 2008. People who own tax-deferred savings bonds, for example, might elect to pay taxes on all their accrued interest this year, and pay taxes on future interest as it accrues, says Scharin.

If you're a landlord, says Michael W. Alderman, an East Meadow CPA, you might want to ask tenants to prepay their 2009 rent for a discount. "And if you plan to sell a business or business-owned real estate, you might want to do it before the end of 2008 to take advantage of the current 15 percent maximum capital gains rate," adds Alderman. Also, you might prefer a sale for cash upfront to an agreement to collect future payments, which may be taxable at a higher rate.

People who turn 70 1/2 this year have until April 1, 2009, to take their 2008 required minimum distributions from their IRAs, notes Alderman - but they might opt to do it in 2008 if they think their taxes will be higher next year.

One word of warning: Be sure to discuss the pros and cons of these moves with your tax adviser. You certainly don't want to pull so much income into 2008 that you wind up throwing yourself into a higher tax bracket.

Send questions to Family Finance, Business Desk, Newsday, 235 Pinelawn Rd., Melville, NY 11747-4250, or e-mail to Bfamfin@aol.com. Include your age, income and a list of major assets. Letters and e-mails can't be answered personally.