With the end of the year in sight, it’s a good time to consider ways to reduce taxes. In a
recent article (Time is Right to Harvest Your Portfolio, November 18th, 2007) we
discussed one way you can save on taxes. Scan your portfolio for losers with little or no
gain potential, then sell them to capture losses. Use the losses to reduce your 2007
gross income.
There are a number of other things you can do to lower your 2007 tax liability. Below
are some other possibilities you should consider.
If you can itemize your deductions (on Schedule A):
(1) Keep track of your non-cash charitable donations. Save your receipts and make an
inventory of your donations to Purple Heart, Goodwill, Vietnam Vets, etc. A recent
change resulting from the Pension Protection Act now eliminates the deductibility of non-
cash contributions unless they are considered in “good” condition. The IRS hasn’t
defined “good condition” so be conservative with your evaluations.
(2) Keep track of all your cash contributions to charities. The Pension Protection Act
also requires a receipt for all cash contributions. You can no longer deduct the cash
you placed in the church collection plate unless you obtain a receipt.
(3) If you recently bought a new house, check your closing papers. There may be some
prorated property taxes that you paid to the seller.
(4) If you have large enough out-of-pocket work or miscellaneous expenses (exceeding
2% of your AGI), you should keep track of them! These include union dues, job hunting
expenses, small tools expense, cost of professional publications, safe deposit box fees,
IRA fees and tax preparation fees.
Even if you can’t itemize (many retirees who own their homes free and clear):
Try “bunching” deductions. This involves itemizing every other year. Do this by:
- Making additional property tax payments in a year. (Pay one winter bill in January and
pay the other winter bill in December of the same year).
- If you make state quarterly estimated tax payments, make 5 in one year and 3 in the
next.
- Give away double your non-cash and cash contributions in one year and none in the
next.
Obviously, you will only want to do this if it will help you to itemize.
Be aware of special Michigan credits:
The State of Michigan recognizes specific charities for a separate State of Michigan tax
credit on top of the federal charitable deduction. While it may not impact your choice in
making charitable contributions, it is noteworthy in case you are missing out on the
additional tax savings.
Utilize Flexible Spending Plans through your employer:
Flexible spending plans (i.e. those offered through Aflac) for out-of-pocket medical
expenses and/or childcare expenses can save you a lot in taxes. Sign up for these
plans if they are offered to you.
If you’re over age 70 and ½:
You can donate the taxable portion of your minimum required IRA distribution directly to
a charity and avoid paying any income taxes (up to a $ 100,000 contribution). Note that
the donation must be made directly from the IRA to the charitable organization. It may be
difficult to do this with some IRA administrators. This option expires at the end of 2007.
If you itemize deductions, any savings may be limited by the IRS regulations.
If you’ve made major cash purchases in 2007:
Again in 2007, you can decide to either deduct state sales taxes paid or your state’s
income tax paid, whichever is larger, on your federal income tax return.
If you’re planning to purchase some mutual funds in the near future:
Be careful about buying a tax liability. Mutual funds must distribute at least 90% of their
capital gains and dividends annually. Many make these distributions in late December.
If you buy such a fund before the distribution “record date”, you will be liable for tax on
all the year-end distributions, even though the gains occurred prior to your purchase.
So find out what the fund’s “record date” is and make sure your purchase is after that
date.
Most importantly, make sure you fund your retirement plans. You’ll not only
save taxes but you’ll pave the way for a successful financial future!
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, December, 2007, Re-titled: Close Out the Year With
Our Tax-Saving Tips
Tax Saving Tips for 2007
By David and Erin Patterson