My Tax Optimization Strategy For 2008

For 2008, our goal is to manage our taxable income to qualify for several of tax benefits, to minimize our tax liability. Since I retired in my forties in 2007, we will be able to "control" our taxable income since we have minimal regular wage (W-2) income and will be living off our savings. The tax benefits for which we will likely qualify are shown below.

Tax Benefit #1. Convert regular IRAs to Roth IRAs. Roth IRAs have two benefits over regular IRAs: 1) Roth IRA distributions are tax free and 2) Roth IRAs have no required minimum distribution after age 70 1/2. Both of these benefits can result in significant tax savings in the future.

The income limit to do a Roth conversion. for 2008 and 2009 is $100,000, including the taxable part of the IRA conversion. In 2010, there will be no income limit.

Tax Benefit #2. 0% on long term capital gains for stock sales. From 2008 to 2010, the long term capital gains rate is 0% for taxpayers in the 10% and 15% tax brackets. For 2008, the top of the 15% tax bracket is $32,550 for single and $65,100 for married filing joint (MFJ). Remember, taxable income is the income after adjustments, exemptions and deductions.

Tax Benefit #3. Child and education related tax credits. The child tax credit is $1000 per child and begins to phase out at $100,000 AGI for MFJ and $75,000 for single. Lifetime learning tax credits are up to $2000 and begin to phase out at $90,000 AGI for MFJ and $45,000 AGI for single.

Tax Benefit #4. I have not found 2008 adoption tax credit numbers. However, the adoption tax credit in 2007 was $11,390 and began to phase out at $170,820.

At this point, I expect we will be able to qualify for the first three tax benefits. The fourth tax benefit will depend on whether we get an adoption referral in 2008. Since we are doing an international adoption, we cannot claim the tax credits until the adoption is completed.

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

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