Urgent Recommendations for the
Current Crisis
This is not the standard list of year-end tax planning tips — the current economic situation requires some urgent and usual actions. Please read and consider carefully this year's suggestions.
Take some stock losses now.
Chances are you have some securities that have declined in value since you acquired them. You will not get any tax benefit from these losses unless you sell. You may be surprised at year-end when you receive Form 1099 from your mutual fund investment indicating that you have to pay tax on capital gains distributions from a fund that declined in value in 2008. Most mutual funds experienced a very high redemption rate in the last 2 months which required them to sell significant portions of their portfolio. In many cases, they sold stocks they had held for a long time, and they must recognize capital gains on the sale. Even worse, some sold stocks they have only held a short time, and the gains will be taxed at higher short-term rates. These gains are going to be "passed through" to you on your 1099. For example, Oppenheimer Developing Markets Fund has fallen 50% in value this year but has estimated reporting long and short-term capital gains of $7.20 per share. Avoid paying unnecessary tax by realizing losses of at least $3,000 more than your expected gains. If you don't know what your gains will be, contact your investment advisor for an estimate of your capital gain distributions this year. Count only the distributions that are in your taxable accounts, not your retirement plans. Please note that you need to take your losses in non-retirement accounts to get the tax benefits.
Prepare a 2-year cash flow forecast complete with a projected balance sheet.
We recommend this process be performed for both your business and your personal finances. In your forecast, analyze the consequences of a significant drop in income and determine what your cash flow needs are going to be. Prioritize your expenses and determine which ones are absolutely essential, such as continuing to make payroll so that you can retain your good employees. Start investigating alternative sources of cash flow in the event that the downturn worsens. Make plans to pursue these alternatives in a timely manner so that the cash will be there when you need it. We are expecting a significant economic recession to continue and deepen into 2009, so don't be unprepared.
Borrow the money you are going to need right now.
Credit markets are drying up and things promise to get worse over the next few months. If you have a home equity line of credit and you were planning on borrowing against it in the near future, borrow the money now before it's too late. Many lenders are tightening up their lending practices and freezing existing lines of credit. Countrywide, for example, has frozen equity lines for 122,000 homeowners across the country, and most recently right here in Ypsilanti. Language in the credit line states that the line may be frozen if there is a significant drop in value of real estate prices in your neighborhood. Other sources of credit are likely to get tighter - so make your financing arrangements now in anticipation of hard times ahead.
Make a special effort to maintain your mental health.
This may sound funny coming from your financial advisor, but take this suggestion seriously. Economic stress takes a very serious toll on your judgment and reasoning. Maintain yourself properly with diet, exercise, family involvement, philanthropy, vacations, therapy, and any of the other mental health techniques that work well for you. Difficult times like these require acute decision-making and you need to maintain your psyche so that you are up to the task.
Important Tax Law Changes
We urge you to review the tax law changes coming into effect to see if they affect you:
- The ability to make Charitable Contributions of up to $100,000 directly from an IRA account was extended from 2007 through 2009 This is a real tax-saver, especially for avoiding the double tax on inherited IRAs. You must be 70 1/2 to qualify. Other restrictions apply — call for details.
- Residential energy credits back in 2009 This $500 credit expired in 2007 but is back in 2009. So if you were planning on new windows, doors, skylights, or insulation, you may wish to defer the purchase until 2009 to get the credit.
- First time home buyer credit The IRS is offering up to $7,500 refundable tax credit for eligible first-home buyers through July 1, 2009. The credit must be repaid over 16 years - so this is essentially an interest-free loan from the IRS.
- Modification of $250,000 Principle Residence Exclusion Beginning in 2009, there is a change to the exclusion of gain on the sale of a principle residence. Gain allocated to a "nonqualified use period" after December 31, 2008, is not excluded from gross income. So if you were planning on moving in to your vacation home sometime in the future to qualify it for the exclusion, you will have to move in by December 31, 2008, to preserve the full exclusion. Call for a full explanation.
- Economic Stimulus Rebate If you did not qualify for the full $600 or $1200 rebate based on your 2007 tax return, you may qualify for the rest when you file your 2008 return. This is extremely important for taxpayers whose income increased or decreased in 2008 or for taxpayers who can no longer be claimed as a dependent on another persons return.
- Depreciation for 2008 The Economic Stimulus Act dramatically increased depreciation and the Section 179 allowance for assets placed in service during 2008. You may wish to acquire depreciable equipment this year if you are going to need it in the near future. In particular, new passenger automobiles purchased by December 31 are entitled to an extra $8,000 of first-year depreciation.
Set up a Year-End Tax Planning Session with Us
Learn how these and all the other changes affect you for 2008 — set up a year-end tax planning session now. Call us at 734-994-1288.
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