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Fourth-Quarter Tax-Planning Tips for Portfolios

Fourth-Quarter Tax-Planning Tips for Portfolios

Helen Modly, 11/01/2007

It's the fourth quarter and time to think about year-end planning for your clients' portfolios.

A quick, but focused review can identify opportunities to minimize tax liability and take advantage of several interesting tax developments coming our way next year. Before you pull out your accounts to review, take a few moments to familiarize yourself with the two main tax changes that might affect investors in 2008.

0% Tax Rate
Those taxpayers whose taxable income keeps them in the 0% to 15% federal marginal brackets will enjoy a 0% tax rate on long-term capital gains and qualified dividends for tax years 2008 through 2010. The threshold for the 15% bracket (using 2007 limits) is $63,700 for married taxpayers filing jointly and $31,850 for single filers.

Remember also that married couples filing jointly can shelter an additional $17,500 in income using their standard deductions and personal exemptions. If they have significant schedule A deductions, the amount could be even larger. Single filers can shelter $8,750 with their standard deduction and personal exemption.

Any long-term capital gains or qualified dividend income that combined with income from other sources will be taxed at a 0% rate to the extent that is comes under the upper threshold for the 15% bracket.

Who May Benefit?
This reduction in tax rate will not help your higher income clients, but don't overlook your soon-to-be-retired clients. Clients retiring in the next three years often have a choice of income sources to use for retirement income. If they have significant embedded capital gains from appreciate securities in their taxable portfolios, this 0% rate may be worth more than the gold watch. They could delay social security payments and sometimes even pension benefits and use investment gains and dividends up to the threshold limit to fund expenses. This would require selling the securities, but the original principal and any excess proceeds could be reinvested with a new higher tax basis.

We all have clients who have been reluctant to sell granddaddy's stock. If they can limit other taxable income in the next three years, this might be the best argument yet for finally diversifying their portfolios. With a wink, you might also warn them that a new administration is far less likely to keep the historically low tax rates on investment income that we have enjoyed for the past few years.

Forget About the Kiddies
Kiddie tax is a nasty trap to prevent the wealthy from shifting taxable income to their children, who usually enjoy a much lower marginal bracket than their parents. In the past, children 14 and older could receive unearned income, such as capital gains, and have that income taxed at their own tax rate. Children younger than 14 were taxed at their parent's highest marginal rate for any unearned income of more than $1,700 per year.

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