Many tax provisions that had already expired or were scheduled to expire at the end of the year were extended as part of the Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008. Included in the list of extended provisions is an additional one year alternative minimum tax (AMT) "patch," eliminating a level of uncertainty that would otherwise have plagued many individuals as they reviewed their year-end tax situation. As always, year-end presents both an opportunity and a challenge when it comes to tax planning. But keep in mind that the window of opportunity for many tax saving moves closes on December 31.
The basics: timing is everything
Year-end tax planning is as much about the 2009 tax year as it is about the 2008 tax year. There's a real opportunity for tax savings when you can predict that you'll be paying taxes at a lower rate in one year than in the other. If that's the case, some simple year-end moves can pay off in a big way.
Unless you think you'll be in a higher bracket next year, look for opportunities to defer income to 2009. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Similarly, you may be able to accelerate deductions into 2008 by paying some deductible expenses such as medical expenses, interest, and state and local taxes before year end.
Delay income
Accelerate deductions
AMT: What you don't know could hurt you
If you're subject to the alternative minimum tax (AMT), traditional year-end maneuvers, like deferring income and accelerating deductions, can actually hurt you. The AMT--essentially a separate federal income tax system with its own rates and rules--effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end moves. For example, if you're subject to the AMT in 2008, prepaying 2009 state and local taxes won't help your 2008 tax situation, but could hurt your 2009 bottom line.
The Emergency Economic Stabilization Act brought the latest in a long series of temporary "fixes" for AMT, but this patch (which includes increased AMT exemption amounts), expires at the end of the year. It's likely that a more permanent solution will be implemented next year, but the specifics of such a permanent solution are uncertain.
AMT exemption amounts
2007
2008
Married filing jointly
$66,250
$69,950
Single or head of household
$44,350
$46,200
Married filing separately
$33,125
$34,975
There's also good news for many who have been subject to AMT in prior years, particularly those caught in the AMT web as a result of exercising incentive stock options in the past. The Stabilization Act makes the calculation of the AMT refundable credit amount more taxpayer-friendly (through 2012), and eliminates the phase-out of the refundable credit amount for individuals with higher adjusted gross incomes. The Act also provides for an abatement of outstanding tax balances owed as of October 3, 2008, attributable to the AMT treatment of incentive stock options. The bottom line? Consider carefully your AMT situation for 2008 in light of the recent changes.
IRA and retirement plan opportunities
Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2008 income. Contributions you make to a Roth IRA (assuming that you meet the income requirements) or a Roth 401(k) aren't deductible, so there's no tax benefit for 2008, but qualified Roth distributions are completely free from federal income tax--making these retirement savings vehicles very appealing.
For 2008, the maximum amount that you can contribute to a 401(k) plan is $15,500, and you can contribute up to $5,000 to an IRA. If you're age 50 or older, you can contribute up to $20,500 to a 401(k) and up to $6,000 to an IRA. The window to make 2008 contributions to your 401(k) closes at the end of the year, while you can generally make 2008 contributions to your IRA until April 15, 2009.
For some, it may make sense to think past 2008 and 2009: If you qualify, consider whether it makes sense to convert some or all of your traditional IRA assets to a Roth IRA. Funds that you convert, to the extent that the funds represent investment earnings and deductible contributions, are considered taxable income. Nevertheless, the potential future tax benefit could outweigh the current tax bill.
New and extended provisions
The Emergency Economic Stabilization Act also extended several popular provisions that had expired or were set to expire. To the extent that they apply to you, be sure to factor these items into your year-end analysis:
Energy efficient home improvements
A credit of up to $500 for the purchase of energy efficient home improvements (e.g., insulation, exterior windows and doors) and energy efficient property (e.g., qualified furnaces) expired at the end of 2007.
The Emergency Economic Stabilization Act reinstated the credit, but only for property placed in service during 2009. While limited in scope--for example, the credit is capped at $200 for windows, and $150 for qualified furnaces--the credit offers an opportunity for savings. If you're eligible for the credit, and plan on making a qualifying improvement or purchase, waiting until 2009 to do so might make sense in order to qualify for the credit.
Talk to a professional
When it comes to year-end planning, there's always a lot to think about. A financial professional can help you evaluate your situation and determine which year-end moves make the most sense for you.
The Fed kept short term interest rates steady today. Here's the satement they released accompanying the announcemnt of their decision:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting
Are you pre-qualified or pre-approved for a loan?Before you begin to shop for a new home, you should set up a time to meet with me so we can figure out how much you can afford. This will put you in a better position as a buyer. That’s when it is important to understand the distinction between being pre-qualified for a loan and pre-approved for a loan. The difference between the two terms will be crucial when you decide to make an offer on a house.
To get pre-qualified for a loan, I will collect information about your debt, income, and assets. We’ll look at your credit profile and assess goals for a down payment and get an idea of different loan programs that would work for you. I will issue you a pre-qualification letter indicating the amount you are pre-qualified to borrow.
It is important to understand that a pre-qualification letter is just an estimate of what you are eligible to borrow, not a commitment to lend. Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have been approved for a loan for a specified amount.
To get pre-approved, you will complete a mortgage application and provide me with various information verifying your employment, assets and financial status such as pay stubs, W-2 forms, tax returns, banking and investment account statements. We’ll review your mortgage options and submit your application to the lender that best meets your needs. Once the application process is complete you will receive a pre-approval letter indicating the amount your lender is willing to lend you for your home.
A pre-approval letter is not binding on the lender; it is subject to an appraisal of the home you wish to purchase and certain other conditions. If your financial situation changes (e.g. you lose your job), interest rates rise or a specified expiration date passes, your lender must review your situation and recalculate your mortgage amount accordingly.
The law requiring the use of a hands free device for using cell phones while driving goes into effect today. The fine if cited is pretty steep, so don't forget to plug in if you're going to talk and drive.
The stock market has been taking a serious beating over the past week due to more reports of write downs from financial companies, record high oil prices and concerns that oil prices will continue to climb if Iran makes good on its threat to close down one of the most important oil shiping waterways in the world. The bond market has been the winner as the result of all this negative economic news and mortgage rates have improved as a result. Now could be a great time to lock a rate in if you're considering buying a home or refinancing an existing mortgage loan.
Faced with the problems of a looming recession and rising inflation, Federal Reserve officials decided not to change the Key Fed Funds rate today. It marks the first time in the last ten months that the central bank has chosen not to reduce interest rates at the regularly scheduled meeting
Explaining the decision, chairman Ben Bernanke said that the threats to economic growth "appear to have dimished somewhat" but that "the upside risks to inflation and inflation expectations have increased." Bernanke added futher that Fed officials expect "inflation to moderate later this year and next year."
Many followers of the financial markets expct the Fed could start raising rates as soon as the next meeting in August in response to inflation concerns. Otherss argue that the weak economy and rising unemployment will keep the Fed on the sidelines until after the November elections.
Economic news has been faily negative recently. The Consumer Confidence index came in yesterday far below analysts predictions and of course oil prices continue to increase pinching consumers pocketbooks.
In spite of the negative economic data, mortgage bonds have continued to slide into negative territory over the last three weeks hurting mortgage interest rates. Mortgage rates are still near all times low however and home prices remain favorable making it a great time if you are in the market to purchase a home.
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