Strategies to Consider Now: Year End Tax Planning

As December 31st approaches, it’s time to think about implementing some year-end tax-planning strategies.

Failure to do so can cost you, your family and your business thousands of current and future tax dollars. Fortunately, there are plenty of things you can do to reduce both your current income tax bill and your family’s future estate tax bill.

Estate Tax Planning
The most basic estate planning tool is the annual gift exclusion. Every person can gift up to $12,000 per year (increasing to $13,000 for 2009) to an unlimited number of children or other persons.

The most basic estate planning tool is the annual gift exclusion. Every person can gift up to $12,000 per year.

This is a “use it now or lose it forever” exclusion; you cannot go back to previous years for unused gifts. These gifts are often used to fund life insurance trusts (to pay estate settlement taxes) or to fund special needs trusts for children and grandchildren. (Note: Certain expenses can be paid for children that do not apply against the annual exclusion, examples being tuition, books and medical care.)

Income Tax Planning
An obvious first place to look is your employer’s 401(k) plan. Make sure you have contributed the maximum, which directly reduces your taxable income. Contributions must be made by December 31st. Similarly, if you are eligible for an IRA, start planning for that, though you have until you file your tax return to make the contribution.

If your workplace offers a Flexible Spending Account (FSA) or Health Savings Account you will need to make decisions as to how much to contribute to those plans for next year. It is obviously cheaper to pay your out-of-pocket medical expenses with pre-tax dollars, so contribute as much as you think you’ll spend. But plan carefully: if you have an FSA and don’t spend everything you’ve contributed, or don’t submit your reimbursement request on time, you lose that money forever.

Charitable contributions may also reduce your current income tax. Cash contributions can be as much as 50 percent of Adjusted Gross Income (AGI). Non-cash contributions such as stock can be up to 30 percent of AGI. Gifts of appreciated stock can be a real win-win for you and your favorite charity. Rather than selling a stock and paying taxes on the gain, you can simply gift the stock. You get to deduct the current market value (up to 30 percent of AGI), and the charity can sell the stock with no tax.

Finally, year-end is a good time to attend to issues we think about all year, but often put off for another day. Don’t neglect issues such as estate planning updates, insurance reviews for life, disability and long term care coverage, business succession plans and exit strategies, corporate bonuses, employee benefits and key executive programs.

Norman Pappas is president and founder of Pappas Financial and the author of several articles on business and estate planning topics. His book, Passing the Bucks, is a guide to business succession and wealth transfer planning. He can be reached at [email protected].