Vincent F. Orza, Jr.
Dean, Meinders School of Business, OCU
With the holiday season upon us, now is the perfect time to review your financial position and do a few things to make or save a couple of bucks on taxes. The very fact that you are reading a magazine the quality of distinctly OKLAHOMA is an indication that you are likely to be well above average financially. No doubt, you wonder this time of year what you can possibly give to friends and relatives who already have it all! Does your boss really need another tie – especially one you feel obligated to pay $50 or $100 for? You’ve been exchanging gifts with close friends for years, and each year you both say, “You shouldn’t have.” Your kids are grown, making good money, and they own a wonderful home. They really don’t need anything… but you still keep looking for something to give them.
Let me make it easy for you – consider making a charitable donation honoring someone. Send a check to the Red Cross in honor of your boss. Send a check to Habitat for Humanity on behalf of a friend. Make a contribution to OCU, OSU, OU, UCO or any other school, with a request that the funds be used for a scholarship in someone’s name. Then send your boss, friends or family a card letting them know you made a gift to a non-profit organization in their name.
This is a wonderful gesture that is much more meaningful than a gift someone neither needs nor wants. It is a true representation of the meaning of the holiday season. The spirit of giving is extended to those benefiting from your gift, to the person in whose name you made the gift, and to you. It might also inspire your boss, friend or relative to make a donation in someone else’s name. The cycle of giving begins with a gift, and you have the pleasure of knowing you started the ball rolling. You also get a tax benefit based on your current tax bracket if the organization meets the definition of a qualifying charity, so be sure to get a written substantiation of the contribution.
The year’s end is also a good time to clean your closets and garage and give to Goodwill, the Salvation Army or other charities your old clothes, furniture or other items. The IRS requires those items be in good condition, but since the IRS decides what’s “good,” make sure you keep a description of your donation.
Remember – you are also entitled to give up to $12,000 to individuals tax-free. Spouses can each make a $12,000 gift to individuals tax-free, for a total of $24,000. Generally, the following are exclusions from taxation: gifts paid directly to educational institutions for tuition, but not books, supplies or dorm fees; gifts paid directly to health care providers for medical expenses; gifts to spouses; gifts to a political organization for its use; and to qualifying charities. The private client advisors at Deloitte are advising their clients interested in family wealth planning to consider gifting appreciated assets, or those expected to appreciate, to their children, who are not subject to the ‘kiddie tax’ and in the two lowest tax brackets.
You might also consider giving U.S. savings bonds. The 2008 stock market has been brutal, but U.S. I bonds earned 4.84 percent from May to October. Interest accrues monthly and compounds semiannually. Keep in mind that bonds held less than five years are subject to a three-month interest penalty, but the bonds are also exempt from state and local income taxes.
Given the nation’s financial condition, income and capital gains tax increases are a possibility. Accelerating income into 2008 is worth considering – take bonuses, dividends and any income this year rather than delaying it until 2009. Tax rates will likely be higher in 2009, so if you have stocks to sell, picking the lowest tax year is part of investment strategy. In fact, it is even more likely tax rates will increase significantly during the baby boomer retirement years, so you might want to visit with a tax expert on your retirement investment strategy.
Deloitte is also advising their clients to perform an Alternative Minimum Tax analysis. The AMT was created nearly 40 years ago to prevent “very wealthy” individuals from avoiding paying income taxes. In 2002, two million Americans came under the AMT; by 2010, it is expected to affect 30 million Americans. If no changes occur, Deloitte says, “about two-thirds of households with incomes between $50,000 and $100,000 and over 85 percent with incomes between $100,000 and $500,000 will be subject to AMT before the end of the decade.” The Congressional Budget Office estimates AMT could affect 70 percent of taxpayers by 2050.
Having told you all of this, I am not a CPA or financial advisor, and certainly not a tax expert. Then again, given the complexity of our tax system, is anyone? These are just tips on things you should visit about with your CPA. Rather takes the “merry” out of Christmas! Happy Holidays.