2007 Year-End Tax Strategies For A New Retiree

As 2007 winds down, here are some tax strategies that I am considering to minimize my tax liability in 2007. As background, I retired in my forties in October, 2007. Thus, I will be a much lower tax bracket in 2008 than in in 2007. Therefore, I am looking to increase the amount of deductions for 2007, while shifting taxable income to 2008. Here are the strategies I am considering:

1. Shift charitable contributions from 2008 to 2007. While I expect to get a deduction in either year, the tax impact of a contribution will be greater in 2007 because of the higher tax bracket. Therefore, I will be paying a number of our 2008 pledges in 2007, e.g. Church, our Alma Maters, and various charitable organizations. Of course, some payments which are normally spread throughout the year (e.g. Church) will need to paid as a lump sum in 2007. Others, such as goods donations will mean doing 2008 spring cleaning before the end of this year. However, the tax savings will be worth it.



2. Shift appropriate tax and interest payments from 2008 to 2007. I plan to pay any tax or interest payments which is already billed but has a 2008 due date. Two examples are property taxes and the January 1, 2008 mortgage payment. In my county, property taxes are paid six months in arrears. Thus, the January to June, 2007 real estate taxes is due in January, 2008 and the July to December, 2007 taxes are due in July, 2008. While people normally wait until 2008 to pay their 2007 real estate tax, I can choose to pay the tax in late December, 2007 and get the deduction this year. Similarly, I can pay my January 1, 2008 mortgage payment in 2008, or pay it in late December 2007 to get the deduction this year.



3. Capture investment losses in 2007. I can sell any stock investments that have losses to offset any gains in 2007. Personally, if I still like a stock, I buy it first and sell the losing shares 31 days later to avoid the wash sale rule. Otherwise, I just sell the stock outright.



4. Delay selling investment gains until 2008. While today's 361 point drop has me a bit nervous, I am going to attempt holding my stocks with gains until 2008. Only two more months, only two more months ....



5. Make estimated state tax payments for Q4 2007. In the past two years, I've owed state taxes when doing the previous year's return, primarily due to investment gains. Unfortunately, any additional state tax payments for 2007 paid in 2008 will need to be deducted on the 2008 returns. Therefore, I am doing a rough estimate of my 2007 investment gains and making a quarterly estimated tax payment in December, 2007.

To note, accelerating deductions only works 100% if one hasn't triggered the AMT tax. If it's not possible to avoid the AMT tax, then it doesn't help to pay real estate and state taxes earlier since the AMT negates the tax benefit of these deductions.

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This is not financial, tax or retirement advice. Please consult a professional advisor.

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