Making Tax Time Less Taxing

Some Georgia experts offer tips on lowering your tax bill. Look for year-end giving opportunities, they say, and don’t forget about your children.

The joyous holiday season also is the harbinger of another, darker period – tax time.

As Georgians were beginning to put their 2007 tax records into good order, Georgia Trend was talking to tax experts for tips on reducing the final bill. Many opportunities for tax savings will be lost after Jan. 1, they told us, especially among six-figure earners.

The experts were unanimous in recommending that such taxpayers seek advice from – who else? – experts. Given the complexity and rapid changes in the federal tax code, not to mention the possibility of the dreaded audit, such advice seems sound.

In each case, our tax experts remind filers there is no one-size-fits-all advice for anyone. Circumstances vary, they say, and tax-saving opportunities that open for one taxpayer may be closed to another.

Last year when the Internal Revenue Service announced the dramatic reduction of more than half of its estate tax attorneys, there were political and editorial howls of “another tax break for the rich.” Not so, counters IRS Commissioner Mark Everson in a USA Today editorial. In fact, writes Everson, “… the IRS is increasing its audits of the rich.”

All of this might be of interest only to students of IRS practices and policies had the category of “rich” not been widened so much by the growing wealth of baby boomers, young entrepreneurs and even blue-collar investors.

“Statistics show that 80 percent of the federal income tax burden has been paid by the top 20 percent of the wealthiest taxpayers,” says Chris Fenn, a practicing CPA, and lecturer on the federal tax system at the colleges of business at Georgia State University and the University of Georgia. “That’s pre-tax income of about $210,000 [annually].”

By contrast, the bottom 20 percent of taxpayers, those earning below $24,000 a year, actually received federal assistance. “With the growing debt crisis looming on the horizon, high-income earners will be faced with increasing demands from the U.S. Treasury,” Fenn says. “The time for careful tax planning is now for 2007, but also for the potentially stormy years ahead.”

As America’s wealthy class continues to expand, and as the federal tax code grows ever more complex, tax filers are turning more and more to a trio of experts to help them reduce tax and personal liabilities. “I advocate the team approach,” says Jack Sawyer, an attorney with the Atlanta firm of Alston & Bird who specializes in estate and tax planning and wealth management. “A CPA, a lawyer and a financial planner are sort of the triumvirate of professional advisors that people with wealth ought to have.”

Experts such as Fenn and Sawyer can earn their keep by finding ways to reduce individual tax obligations.

End-Of-Year Giving

In keeping with the gift-giving spirit of December, some methods of softening the tax blow involve handing over assets to worthy causes and family members, especially children. December, it seems, is an important moment in the 2007 tax year.

“There is one particular area that, as things stand, will go away at the end of the year,” Sawyer says. “That’s the enhanced charitable contribution deduction that’s available for the donation of a conservation easement. So, if people have real estate they want to protect, this year would be the optimum time to do that.”

Donating a piece of land to a trust for a charitable donation deduction can result in a nice reduction of the tax bill, and keep the property in the family. “You can donate that land and take a charitable contribution deduction for the value of the easement, which typically is what the potential development might bring versus its current use,” Sawyer says. “There are special rules that go away at the end of the year that would allow the average person to get more benefit from that deduction.”

December is a time for action on a number of fronts if taxpayers want to save on their 2007 taxes, experts say. “Everyone has the right to give $12,000 a year to as many people as they want,” Sawyer says. “You could hand out $12,000 to every person who walked by on the street and there would be no gift tax consequence to that. One way to transmit wealth to successive generations without incurring transfer tax is to start giving it away during your lifetime.”

The December gift-giving spirit can be used to a taxpayer’s advantage in a number of ways, says Abram Serotta, president of Serotta Mad-docks Evans, an Augusta accounting firm. “If you’re scheduled to make charitable contributions in the next three to four months, December being one of them, you might want to consider paying off your charitable contribution by Dec. 31, he says. “You can pay your charitable contributions by credit card and have them deductible [for 2007].”

December is also a good month to consider other 2007 taxes as possible deductions at federal tax time. “Look at various taxes [such as] property taxes and state income taxes, and if you are going to have a balance due on state income taxes, you may want to pay them by Dec. 31,” says Serotta. He adds that December is a good time for taxpayers to ask themselves some key questions: “Is there a possibility of increasing or deferring income? Are there any transactions you can either close or defer, for instance the sale of property or the sale of stocks?”

Not all taxpayers needing more deductions know just where to put their cash, stocks or assets when looking to make a year-end charitable contribution, says Chris Dardaman, CEO and chief investment officer at Brightworth, an Atlanta wealth management firm. The undecided should look at a Donor Advised Fund, an easy way to get a charitable deduction for 2007 even if the gift isn’t made until 2008 or even later.

“We are seeing an increasing number of people do this,” Dardaman says. “Let’s suppose a client is selling a company or has a stock they need to sell by year’s end and their accountant says it’s time to make a charitable donation, and the client says, ‘Sure but I don’t exactly know who I want to give that to right now.’

“What they can do is create a sort of charitable bank account that is designed for giving, so that when the money goes in there the client can get a charitable deduction for 2007. You can keep it for years so long as the overall fund itself meets the IRS minimum distribution rules.”

Brightworth partner and personal wealth advisor Ray Padron is asking his clients, “Does your non-working spouse have an IRA?”

If not, he says, some taxpayers may want to consider beginning one with a view toward converting it to a Roth IRA down the road. These nondeductible contributions of $5,000 annually can be made for the 2007 tax year as late as April 14, 2008, Padron says. After four years of such contributions to the IRA, and factoring in growth of $10,000, the account could hold $30,000.

“If the IRA is worth $30,000 at the time of the conversion [to a Roth IRA], then you will only have to pay income tax on the $10,000 of growth,” Padron says. Your spouse will then have a Roth IRA that can grow tax free for decades, with tax free withdrawals as well.” Tax experts say the path to the 2010 IRA conversion can begin with a 401(k). The Roth conversion plan is available to spouses over the age of 50.

Financial planner Helga Cuthbert of Decatur’s Touchstone Financial Guidance is advising her clients to take an end-of-the-year look at the advantages of some government securities.

“Right now, Treasury Bills are yielding pretty close to money market and CD rates,” she says. “There is a tax advantage there in that the interest earned off those treasury notes, up to a certain limit, are not subject to Georgia state tax, which is six percent.”

Cuthbert says she’s also cautioning her clients that it might be better to take a few prudent steps at year’s end to hedge against the vagaries of the coming year.

“There is uncertainty about what is going to happen in ’08 as far as any potential changes in the tax laws governing capital gains,” she says. “It’s all speculation right now, but I am really encouraging people to go ahead if they are going to take gains and take them now and spread them, maybe, between 2007 and 2008.”

The Kiddie tax

Many experts are advising clients on the so-called “kiddie tax,” or moving assets to their children.

“The kiddie tax law was originally established to prevent well-off families from abusing the strategy of shifting unearned income to their children, where it would be taxed at a lower tax rate than their own,” says tax authority Chris Fenn. Originally applied only to children under 14, the age limit has been raised and expanded somewhat, Fenn says.

“Effective Jan. 1, 2008, the kiddie tax will apply to children age 18 and younger, as well as dependent college students under the age of 24,” Fenn says.

What’s a parent to do? “Parents with a child who is out of the kiddie tax now but who will be hit by it in 2008 should consider giving assets to the child to sell in 2007,” Fenn says. “That way, the gains will be taxed at 5 percent instead of 15 percent.”

The child may sell the assets even if they were held for only a day, Fenn says, “thereby benefiting from a favorable long-term rate, so long as the parents had held the assets for more than 12 months.”

The federal tax code has seemingly forced parents to bring their children to the kitchen table for tax planning sessions when they are barely out of their diapers. “Many of the decisions we now make for the parents we make for the children,” Serotta says. “One solution we talk to parents about is putting money away under tax incentives for their children’s education.”

One such possibility mentioned by several of the tax experts is the 529 plan. “There is a considerable amount of money you can put in per child,” Serotta says. “You can really load this up. In the federal tax code this does not get you a deduction, but it may eliminate income in your child’s name that may be taxed in the parent’s bracket.”

But, he says, the state of Georgia tax code does allow deductions for contributions to a 529 plan if it is a Georgia plan. “If you are a resident of Georgia, you can reduce your taxable income by up to $2,000 per beneficiary by using a Georgia plan. If my high-income earner had an unincorporated business or had a flow-through business, then I would be looking at the business to see what deductions we could create [in December], such as buying new office equipment.”

Our tax experts say they are seeing more and more clients who have come by wealth suddenly, and not via the lottery. “It’s not unusual to see people in their 50s and 60s all of a sudden inheriting a substantial amount of wealth from their deceased parents,” Sawyer says. “And they don’t have the experience to deal with that and the question is: ‘How do I go about investing several million dollars?’”

When the earliest baby boomers reached 60 in 2006, that marked the beginning of the greatest transfer of wealth in history, one that will continue over the next two decades. In that context, Sawyer’s question will be at the center of that wealth management, and its tax liabilities.