2008 Tax Planning Begins Now
You probably feel good that you filed your tax return on or before April 15 and that you can forget about taxes for another year. Not so fast. Remember the struggles involved with the preparation of the recently filed return. Prior to tucking away your 2007 return, take a good look at it again, and determine how better record keeping and planning throughout the year could have assisted you during preparation time.
Tax planning begins with good organization. Valuable deductions are lost as a result of poor record keeping. Also, effective tax planning is a year–round undertaking that works best if started early.
Keep good records starting with your primary asset, namely your house. Additions and other major improvements increase your basis (cost) when you sell, decreasing the tax on your capital gain (for those who qualify for the capital gain exclusion) in excess of $250,000 for single filers, and $500,000 for married filers. Closing costs that were not deductible when you purchased your home also add to your basis and points incurred to refinance your mortgage become fully deductible in the year you sell your home.
Maintaining good records for your investments is imperative. Most people have incurred losses as a result of the prolonged bear market. Keeping track of your basis (cost) will enable you to readily determine your capital losses or determine the amount of gains for those that are so fortunate.
With regard to year-round tax planning, start by determining your short term and long-term goals and objectives. Quantify your goals and objectives so that you can determine what it will take to get there based upon your time line. Almost everyone wants to save for a comfortable retirement, save for a down payment for that first house, or save for their children’s college education.
Take advantage of every opportunity that exists to put money into a tax-favored program. Do it as early in the year as possible. Use your employer’s 401(k) plan, start an IRA, or add to an existing IRA.
Tax-favored education accounts allow you to contribute after tax dollars currently for subsequent tax-free withdrawals for qualified education expenses. Coverdell accounts permit you to contribute up to $2,000 per year (if you qualify, based on income), per child, under age 18 to cover costs of pre college education expenses as well as college expenses. State 529 plans allow you to contribute to the plan for qualified college expenses. The allowable lifetime contribution amounts vary per state but most are around $200,000 per beneficiary. Contributions are subject to gift tax. The $12,000 annual exclusion ($24,000 per married couple) can be used for this purpose.
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