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Five steps to take before year-end to avoid potential Obama income tax increases


Upper-income taxpayers concerned about avoiding having to pay income taxes at higher income tax rates under the Obama administration need to make tax-saving moves before the year end, according to Michael Gray, CPA.

“The details of tax changes will be negotiated by Congress next year,” says Mr. Gray. “According to a summary by the Tax Policy Center, Obama has proposed to restore the 39.6% maximum bracket in 2009 that we had under Clinton for single taxpayers with income exceeding $200,000 and married taxpayers who file joint returns with income exceeding $250,000. The maximum rate for long-term capital gains and qualified dividends for those taxpayers would also increase from 15% to 20%.”

Upper-income taxpayers who want to avoid those increases can take the following steps:

1. Accelerate ordinary income to 2008. Service businesses can get billings out quickly for 2008 services, and collect advance payments and retainers. Consider exercising stock options during 2008 instead of later.

2. Take capital gains in 2008. With the stock market down, this may not be as beneficial as it otherwise might be. You can sell securities that qualify for long-term capital gains and buy them back. The wash sale rules apply to sales for a loss, but not for gains. Consider postponing capital losses until 2009 for a greater tax benefit.

3. If you make an installment sale, consider electing out. When a sale is made of certain property, such as real estate, for which you receive an installment payment note, you can elect to pay the tax as you receive principal payments. If you want to avoid higher future tax rates, you can elect to report the gain for the year of sale instead of the installment sale method.

4. Don’t exchange real estate during 2008. Tax deferral automatically applies to most real estate exchanges. If you want to pay tax currently, don’t exchange.

5. Postpone deductions. You might get more “bang for your buck” from tax deductions for items like mortgage interest, property taxes, state income taxes and charitable contributions in 2009. Consider postponing those payments until next year. But watch the alternative minimum tax!

Don’t let the tail wag the dog! Five percent isn’t a huge tax difference to drive financial decisions. Consult with a tax advisor to avoid making a planning error relating to your personal situation.

Michael Gray writes a free email newsletter about tax developments and tax-saving strategies. You can subscribe at



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