Year-End Tax Planning: Some Considerations Before Jan. 1

By Hyman G. Darling

When is the best time to do year-end tax planning? Certainly, not after January 1st unless you are planning for the following year! The time to do year-end tax planning is right now so that all tax issues are reviewed properly in order to minimize tax liability or potentially gain a larger refund. Here are some of the options available:

Sell assets that are at a loss

It is important to consider selling a stock that may have a loss before the end of the year. Note that losses will offset gains, and to the extent that the losses are greater than gains, up to $3,000 may be written off against ordinary income on an annual basis. Losses in excess of that amount may be carried over to future years. If you are married filing separately, the maximum loss write-off amount is $1,500. Nevertheless, if you are holding a stock and you really don't anticipate that it will go up in value, it should be sold with the loss taken to reduce taxable income.

Standard deduction

You may feel that if you borrow additional funds or make additional charitable contributions, you will obtain an additional write-off. This is true only if you can write these expenses off as itemized deductions. The standard deduction (in 2008) for a single person is $5,450, and $10,900 for married couples. You will only be able to itemize deductions if you have amounts in excess of these stated amounts. If you are unsure, or if you had made pledges to a charity, it may make sense to review your taxable income before making the charitable deduction. That way, your contributions can all be grouped to take advantage of the deduction sooner rather than later. Similarly, if you are considering refinancing, and if you are paying points, consider whether you should close on December 31st or January 2nd in order to determine the most beneficial year for you to consider taking the itemized deduction of these points.


The amount that may be gifted on an annual basis without the necessity of filing a gift tax return is currently $12,000 per donee per year. To the extent that you have significant highly appreciated assets that may be kept in the family, consider making gifts of these that will reduce the income earned on these gifts, thus saving both estate taxes and income taxes.

Capital gains

Keep in mind that the highest long-term capital gain rate is only 15 percent for qualifying assets. If one considers the potential taxation of other assets verses paying 15 percent only on the gain, not on the entire amount, it may be beneficial to pay this nominal amount as opposed to liquidating other assets in order to utilize funds if necessary. For instance, if a person is in a 28 percent bracket, additional withdrawals from the IRA or 401(k) plan will cause these amounts to be taxable at least at the 28 percent rate if not higher. The sale of a capital gain asset that is not in a qualified plan will trigger only a 15 percent capital gain rate on the gain. (The gain is the amount over the basis.)

Retirement contributions

By depositing funds in an IRA or contributing to your 401(k) through work, which may also be matched by your employer, you are reducing your taxable income, since the income on assets in the IRA or qualified plan are deferred until the withdrawal is made. These assets will continue to increase in value, with all gains, income and appreciation being deferred until a withdrawal is made from the account. If these funds are needed for ongoing expenses, and if you are still working, you should strongly consider depositing funds to an IRA as opposed to merely a CD or savings account. The limit for 2008 is $5,000 for a single person and $10,000 for a couple, or $6,000 for a single person if over 50 and $12,000 if both spouses are over 50 and married. Keep in mind that there are limitations on the contributions that may be made based on income and other specific data.

If you happen to be self-employed, you may wish to consider another type of a retirement plan called a SEP-IRA or a simple IRA. This type of account allows you to make considerable contributions if you have the funds to do so. There is currently a maximum contribution of $46,000 per year, and there are other amounts you may set aside in a separate account for employees if desired. If you have had a good year, and even if you think that the following year may not be as good, you should consider depositing into your SEP-IRA to reduce taxable income. If the following year does not yield the economic results desired or hoped for, there is no requirement to continue funding the account in future years.

As with all tax issues, competent assistance should be obtained from your CPA, who has the knowledge as well as the technical expertise to provide you with the planning before your tax return must be prepared. There is no time like the present to plan, and the old adage is true in that 'if you fail to plan, you plan to fail.'

Hyman G. Darling is an attorney with the ElderLawAnswers member firm of Bacon & Wilson, P.C., in Springfield, Mass. This article originally appeared in the firm's blog, Estate Planning Bits, and has been updated by ElderLawAnswers for tax year 2008.

For more end-of-year tax tips, click here.