Dumb Year End Money Moves: Marriage, AMT, Bonuses & More

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The blogosphere is chock full of things you should do at the end of the year, like making donations and saving kittens, but what about those things you shouldn’t be doing? I’ve put my brain on the subject and while I’m not a tax expert, I believe the following list is a good start of things to avoid doing near the end of the year if you want to save yourself a few tax dollars.

1. Don’t Get Married:

The marriage penalty pretty much sucks (but marriage is awesome!) and your filing status for the year is based on your filing status when the year ends, December 31st. It doesn’t matter if you get married 11:59pm on December 31st or 12:01am on January 1st, your filing status is married no matter what. Is the marriage penalty really that bad? Two singles making $70k a year will pay a total of $13,923.75 each in taxes, or $27,847.5 combined. A married couple making $140k a year combined will pay $28,192.50 – $345 more. I don’t know about you but I’d rather put that $345 into my pocket than Uncle Sam’s.

2. Prepaying Taxes & Other Unallowable Deductions under AMT

The Alternative Minimum Tax is an ugly word lots of people have been throwing around lately and it has the potential of taking a positive tax move and turning it into a hugely negative one. Prepaying certain deductible expenses, such as state/local/property taxes, early allows you to take the deduction earlier – that’s a positive tax move. However, if you are subject to the AMT, you aren’t allowed to take those deductions so you face the double whammy of prepaying your taxes (you lose interest on the money in a bank account) plus you get no benefit for doing so (tax deduction).

First determine if you’re subject to AMT (there is no 2007 calculator, I would just use the 2006). If you are, don’t prepay these normally deductible expenses (state and local income taxes and property taxes, un-reimbursed business expenses, child-tax credits, tax-preparation fees, legal fees, home-equity loan interest). If you are, then try to prepay them if you can so they can be applied to your 2007 tax bill, instead of your 2008 tax bill.

3. Don’t Sell Stock – Lower Capital Gains Rates in 2008

If you’re in the 10% or 15% income tax bracket, next year that your long term capital gains tax will fall to 0%, so wait a few more weeks if you’ve been thinking of pulling the plug on an investment.

4. Defer Compensation If You Can

The following moves all fall under the greater heading of deferring compensation because money you earn in December 2007 is taxed on April 2008. Money earned in January 2008 is taxed in April 2009 – a significant difference for such a short delay.

  • 4a. Don’t Take That Bonus (Yet): Bonuses are hot but try to push the payment of that year end bonus to the new year and you can push the tax bill to next year also.
  • 4b. Don’t Take A Capital Gain (Yet): Much like a bonus, don’t take a capital gain near the end of the year when you can push it to next year. The reasoning is the same – you get your cash in a few weeks and you get the tax bill in over twelve months. If you have a loss this year, you can even use that to reduce your income. (plus, you might be seeing lower tax rates)

This is part of a Money Blog Network group project in which we discuss some great year end money moves, I went against the grain with this one. If you can think of any moves one should avoid at the end of the year or have any thoughts on any of these, please do share them and I’ll add it to the post.

{ 6 comments, please add your thoughts now! }

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6 Responses to “Dumb Year End Money Moves: Marriage, AMT, Bonuses & More”

  1. Kimberly says:

    Unless your new spouse doesn’t work (or makes significantly less than you). Then you can save thousands in taxes.

  2. We actually saved money on taxes when we got married. I wonder how many couples make about the same?

  3. kitty says:

    If you qualified for the 10% or 15% long term capital gains rate this year, next year that tax falls to 0%, so wait a few more weeks if you’ve been thinking of pulling the plug on an investment.”

    This sentence is a bit misleading. I think what you wanted to say here is that if you are in 10% or 15% INCOME tax brackets (which means that you currently qualify for 5% long term capital gains rate), you will pay 0% in 2008 but only on the portion of long term capital gains that doesn’t bring your income to 25% tax bracket. E.g. if your income is 20K below 25% income tax bracket, and you got 100K in capital gains, your rate on 20K out of this 100K will be 0%; your rate on remaining 80K will be 15%.

    15% is the standard long term rate this year for those whose income is too high to qualify for lower rate. The rate for these tax brackets will still be 15% in 2008 (and possibly more thereafter).

  4. On points 3 and 4b, the 0% capital gains rate is only available to taxpayers that are in the 10% or 15% brackets. That is, if the capital gain, when treated as ordinary income, would be taxed at either 10% or 15%.

    For a married couple, that means taxable income of less than $63,700 and $31,850 for a single filer. If you make more than that, you’ll still be paying 15% on any capital gains. There is a good overview at USAToday: 2008 drop in capital gains rate won’t be for everyone

  5. jim says:

    kitty, Erick: Thanks for the catch, it was a slip of the pen – it should instead read 10-15% income tax bracket as you’ve both noticed. Thanks!

  6. Mike Walsh says:

    Your AMT tip (use the 2006 calculator) could be quite dangerous. The 2006 AMT calculator would have been based on a “fixed” AMT which 2006 was. Congress passed the legislation that temporarily patched the AMT in 2005 for the 2006 tax filing.

    The current congress has yet to do this. They should pass something (they BETER pass something) but as of right now they haven’t and many more people than the 2006 calculator would indicate would fall prey.

    There is a 2007 one available at HR Block. I would imagine this is based on current tax law and may be more accurate (unless/until a fix is passed)

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