There’s Still Time To Save - Page 2 of 3

There’s Still Time To Save

meeting before the holiday parties begin. That may help you avoid one of the nastiest pitfalls in the tax code.

The people most likely to owe the AMT are middle- and upper-income taxpayers who live in high-tax states such as California or New York, according to the Tax Policy Center, a research outfit in Washington, D.C. An estimated 4 million taxpayers owed the AMT in 2006, and that number could surpass 23 million in 2007, unless Congress changes the law.

So how can you reduce your potential AMT exposure?

Avoid year-end prepayments. If you pay quarterly estimated taxes, the last payment for this year is due by Jan. 15, 2008. Traditional tax planning calls for you to make an estimated payment of state and local tax by Dec. 31, 2007. That would entitle you to deduct those taxes on your federal tax return for 2007.

However, state and local taxes are not deductible when calculating AMT income, so making that payment in 2007 won’t help. If you will owe the AMT this year, John suggests you wait until early next year to pay your estimated state and local tax. In 2008, you might not owe the AMT, so that January 2008 payment may turn out to be a valuable tax deduction.

Reconsider capital gains. As mentioned above, long-term gains officially are taxed at no higher than 15%. With AMT, though, that’s not always true of large capital gains. “For taxpayers who owe AMT, under certain circumstances, their effective tax rate on long-term capital gains may be 21%,” says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants in Washington, D.C. The reasons are complicated, but the result stems from the fact that as you capture gains, your AMT exemption might be phased out, resulting in a higher income that is subject to the AMT. “In this situation, we might advise clients to take some of the gain in December 2007 and the rest in January 2008,” says John. “That spreads the gain over two tax years and may reduce the effective [tax] rate.”

Now for the “good news”: If you are locked into the AMT for 2007, more of your income will be exposed to taxation, but the rates are relatively modest: 26% and 28%. Say you invested $20,000 in speculative stock this year and that stock now trades at $50,000. You’d like to sell and take your profits before the stock tumbles back to earth. Ordinarily, you’d owe tax on a stock held for a year or less at rates up to 35%. If you’re in the AMT class, though, you can take a short-term capital gain by year-end and pay tax at the lower rates.

Convert your IRA into a Roth IRA.
If you are interested in converting a traditional IRA, you should withdraw funds from the account by year-end .

A traditional IRA is usually funded with money that has never been taxed. If so, all withdrawals are subject to income tax.

A Roth IRA is funded with after-tax dollars; therefore