Plan Now to Take Advantage of Expiring Tax Breaks
Andrew D. Schwartz, CPA
Few can argue that the U.S. income tax code is easy to navigate. Trying to take advantage
of the current set of rules to minimize your tax burden is tough enough. What makes tax planning even
more challenging these days is the fact that most of the recently enacted tax
breaks are scheduled to "sunset" at some point between now and
December 31, 2010.
Let's take a look at some of the current tax savings opportunities with
a limited shelf life, starting with those scheduled to expire at the end of
Energy Efficient Expenditures: Last year's Tax Act provides
incentives for people who make energy efficient improvements to their homes
or commercial buildings. Plus, manufacturers of energy efficient appliances
get a tax credit of between $50 and $200 for each unit produced, so make sure they pass the tax savings along to you
with each qualified purchase.
And if you purchase a
newly constructed energy efficient home, or have your home substantially
2006 or 2007, be aware that the contractor
is eligible for a $2,000 tax credit from the IRS. Most of these energy
efficient tax breaks end
on December 31, 2007.
Increased Section 179 Deduction: Through the end of 2007, you
can elect to write-off the first $108,000 (in 2006, up from $105,000 in
2005) of equipment purchased each year,
instead of depreciating the cost of that equipment over its useful life of 5
or 7 years. Starting in 2008, the Section 179 deduction will once
again be limited to just $25,000 per year. If purchasing a practice or adding equipment
to your existing practice is in your plans, doing so before December 31, 2007 will
allow for a much larger upfront tax deduction. (The 2006 Tax Act extended the increased Section 179 limits through 2009.)
Here are a few tax breaks expiring in 2008:
Reduced Tax Rate on Capital Gains: Currently, the maximum tax rate on
long-term capital gains (assets held for more than one year before
being sold) is 15 percent. Effective January 1, 2009, the capital gains tax
rate is scheduled to jump by one-third to 20 percent. If you plan to sell any of your investments at some point this decade,
consider selling appreciated assets on or before December 31, 2008 to lock in the lower tax
rate. (The recent Tax Act extended the reduced long-term capital gains tax rate through 2010.)
Zero Percent Capital Gains Tax Rate: Believe it or not, the
2003 Tax Act provides for a zero percent capital gains tax rate during 2008
only for people
in the lowest tax bracket. Consider gifting
appreciated assets to your children or grandchildren who will be 14 or older that year, and
have them sell those investments during 2008. Provided the child realizes capital gains of about $30k, no tax
will be owed on that gain (assuming the child has no other income).
Just be careful how this strategy might impact that child's college
financial aid package. (The recent Tax Act extended the zero percent long-term capital gains tax rate through 2010. The Tax Act also raised the age at which children are taxes at their
parent's rate to 17 from 14)
Most everything else expires in 2010:
Your biggest tax planning
challenge is what to do after 2010. On December 31, 2010, the 2001 Tax
Act is scheduled to sunset, with the bulk of the tax rules returning to the
pre-2001 rules. This means that the marriage penalty, stealth tax, and
reduced retirement and education savings limits will return. How
Congress and the President elected in 2008 will deal
with the U.S. income tax code as the provisions of the 2001 Tax Act sunset is quite a
Tax planning one year at a time used to do the trick.
In 2006, with major tax breaks expiring in three out of the next four
years, tax planning is now a five year proposition.
Deadline Looms to Consolidate Student Loans at Today's Low Rates
by Our Friends at
Waiting until the last moment can be risky business, no
matter your profession. Besides adding stress to the situation,
procrastinating can often lead to lost opportunities. When it comes to your current student loan portfolio, if
you're sitting on unconsolidated loans, procrastinating can turn out to be
What happens to those who wait? Every July 1st, rates on variable student
loans are adjusted by the government. Effective July 1, 2006, the interest
rate hikes are projected to be quite significant, as follows:
As you can see, the interest rate for each type of loan is
expected to jump by two full points. As a percentage of the current
rates, the interest rates on PLUS loans will increase by almost 33%
from their current levels, while the interest rates on Stafford loans still in
their grace period jump by more than 40%.
If you have federal student loans of any kind in your student loan
portfolio, consolidating them now will most likely save you thousands of
dollars over the life of your loan.
Let's look at a quick example. Assuming you owe $100,000 in
student loans, you're probably paying approximately $1,075 per month in loan
payments. As of July 1, based on the revised interest rates, expect that
payment to increase to $1,177 per month. By consolidating your student loans before July 1st, you
lock in today's low rates, protect yourself against future rate increases,
and could cut your payment to as low as $560 per month.
You will also have an easier time managing your student loan
portfolio because you will have fewer loans to monitor, and fewer payments
to make each month. Plenty of great information about consolidating is available
What's The Downside?
Students and graduates who are nearly finished paying off
their loans might not benefit from consolidation and could be better served
by simply paying off their loans on schedule. Also, by locking in today's
interest rates, you won’t be able to re-consolidate if rates decrease in the
future. Nonetheless, for the vast majority of students and graduates with
student loans, consolidation remains a prudent choice for managing their
student loan portfolio.
Don't forget that consolidation can take up to 90 days to complete.
And unlike the April 15th deadline to file your tax returns with the IRS,
there are no extensions and no second chances available.
The rates available today will be gone the moment the
clock strikes midnight on July 1. If your loan consolidation isn't
complete by July 1, you'll miss out on the opportunity to lock in today's
Consolidate your student loans today by visiting:
or by calling toll-free (877) 328-1565.
Don't delay - apply immediately so that your loans are
taken care of well before June 30.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
Listen to Andrew Schwartz CPA on the
Money Matter$ Radio Network on Tuesday, May 2 from 9 -
11 am, ET.
Before summer kicks in, take a look at your asset allocation of all
your retirement and non-retirement accounts, and consider
rebalancing your accounts.
- For 2005, the standard deduction for a single individual is
$5,000 and for a married couple is $10,000. A person will benefit by
itemizing once allowable deductions exceed the applicable standard deduction.
Itemized deductions include state and local income taxes (or sales taxes), real estate taxes,
mortgage interest, charitable contributions, and unreimbursed employee business
- For 2005,
the personal exemption is $3,200. Individuals will claim a
personal deduction for themselves, their spouse, and their dependents.
- The maximum earnings subject to social security taxes is $94,200
for 2006, up from $90,000 in 2005.
- The standard mileage rate is $.485 per business mile as of
September 1, 2005 (after being $.405 per mile through August 31, 2005), and
will then be $.445 per mile for 2006.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $15,000 for 2006.
And if you'll be 50 or older by December 31, 2006, you can contribute an extra
$5,000 into your 401(k) or 403(b) account this year.
- The maximum annual contribution to your IRA is $4,000 for
2006. And if you turn 50 by December 31st, you can contribute an extra $1,000 for 2006. You have until April 15, 2007 to make your
2006 IRA contributions.
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