RATE REDUCTIONS
1. Accelerate income. Deferred compensation is attractive when future top rates will be significantly lower than current rates, but that is no longer the case. Regular income tax rates now start at 10 percent, and the top rate as of 2006 is 35 percent. These are historically low rates. Congress is considering legislation, the 2007 Tax Reform Act, that will increase the top tax rate on individual income to 39 percent. Take the money now!
2. Seek investments that pay ordinary dividends or distribute long-term capital gains. The maximum tax rate on both is only 15 percent in 2008.
3. Shift income to children and grandchildren. In 2008, the lowest income tax bracket is 10 percent, 25 percent lower than the highest bracket. Be sure that each child and or grandchild has enough income to take full advantage of the $900 exemption and low rates without becoming subject to the tax on investment income of a child under age 19.
HEALTH SAVINGS ACCOUNTS
4. Investigate the availability of High Deductible Health Plan (HDHP) coverage combined with a Health Savings Account (HSA). Contributions to an HSA are tax deductible and withdrawals to pay medical expenses are not taxed. The Bush administration is determined to encourage the broadest use possible of this new tax-favored medical care benefit, and many insurance companies and banks offer these plans at competitive rates.
NEW IRA CONTRIBUTION LIMITS
In 2008, IRA contributions of up to $5,000 are permitted for anyone with sufficient earned income, and the limit increases to $6,000 for a person that has attained age 50 before year-end. The will continue to increase in $500 increments for years after 2008.
5. Make your maximum allowable IRA contribution as early as possible each year. Tax-deferred accumulation of income begins the day you fund the IRA, and early funding will provide greater account value at retirement. You can make your 2008 IRA contribution as early as January 2, 2008. Consider using your IRA account for the fixed-income portion of your investment plan. This way you will be deferring taxes on what would otherwise be taxed at ordinary income rates. By contrast, if you fund your IRA account with stocks or equity-based mutual funds, you could be converting long-term capital gains taxed at low rates into ordinary income taxed at higher rates when you start taking IRA distributions.
NEW 401(k) DEFERRAL LIMITS
Participants in 401(k), 403(b), and 457 plans can take advantage of expanded limits on contributions. The general limit on contributions to such plans in 2008 is $15,500 with an extra $5,000 allowed for individuals over age 50 by year-end. And it gets better -- employees are permitted to defer up to 100 percent of their compensation up to the deferral limit, if the plan permits it.
6. Defer the maximum allowed by your employer's 401(k) plan. That should also assure you of receiving the maximum benefit from any employer-matching contribution, and will help you receive the maximum tax advantage possible.
7. A non-working spouse might consider working to boost the family retirement assets -- re-entering the work force primarily to make a maximum 401(k) deferral, which for 2008 is the lesser of $15,500 or total compensation.
EXPANDED EDUCATION INCENTIVES
Coordinated rules for Section 529 plans, Coverdell Accounts, Hope credits, and Lifetime Learning credits allow all these sources of funding higher education expenses to be of greater utility to many families. Planning which education costs to pay from what funding source, and when to pay them, is necessary to gain maximum benefit from all available tax-advantaged education assistance programs. Other newsletters explain these education benefits in detail.
8. Take advantage of the Tuition and Fees deduction. In addition to all other assistance provisions, and requiring careful coordination with them for maximum benefit, a deduction of up to $4,000 is allowed for college tuition costs and fees. If your adjusted gross income does not exceed $160,000 for married taxpayers filing jointly, you qualify for the $4,000 limit. If your adjusted gross income does not exceed $80,000 for singles, you qualify for a $2,000 limit. No deduction can be claimed for expenses of a student for whom a Hope or Lifetime Learning credit is also claimed.
9. Fully fund Coverdell Education Savings Accounts. Contributions of up to $2,000 per child are allowed each year, and the benefit is not phased out until contributors have adjusted gross income in a joint return between $190,000 and $220,000. Tax-free withdrawals are also allowed for qualified elementary and secondary education expenses. If you begin funding early enough and fully fund all available programs, you can use the Coverdell account for pre-college costs and coordinate a Section 529 plan with the Hope credit and Lifetime Learning credit for higher education expenses.
10. Fund a Section 529, Qualified Tuition Program (QTP). Tax-free distributions can pay for many higher education expenses. In addition, QTP distributions can be coordinated with Hope and Lifetime Learning credits as long as each is used to cover different expenses.
It’s not about how much your make; it’s about how much you keep. There’
