Year-end tax checklist on IRAs, HSAs and 529s

While uncertainty remains regarding whether Congress will act to “patch” or permanently address the widening number of people set to be caught by the AMT, or Alternative Minimum Tax, this year, there are several tax planning items that should be addressed prior to year end:

The expanding AMT bite. Last year it was estimated that four million taxpayers were ensnared by the AMT and that number is set to rise to 25 million this year if Congress does not act soon. Taxpayers who have a household gross income above $100K, live in a high tax state or are the beneficiary or trustee of an estate may find themselves in the AMT this year. Taxpayers should be careful before prepaying the second installment of their real estate tax bill on their personal residence and/or state income taxes — as these items are added back in calculating AMT. The same applies for miscellaneous deductions in itemized deductions.

Create retirement plans before Dec. 31. Most retirement plans must exist by the end of the year in order to take a deduction for the contribution, but they usually don’t have to be funded until taxes are due. It is important to note that most IRAs can be established up to the original due date of April 15, 2008. A self-employed pension (SEP) IRA can be created and funded by the date your individual return is filed or Oct. 15 — which ever is earlier if the return is extended. This can provide a self-employed individual, who made contributions to a SEP-IRA, a pension deduction up to 25 percent of the compensation paid to the participants during 2007, not to exceed $45,000 per participant.

Health care planning. For taxpayers with Cafeteria or Health Savings Accounts (HSA) plans, note that current law changes given employers (as the plan sponsor) the right to allow employees to rollover unused amounts. Find out if your employer allows a rollover and if not then a trip to the doctor and drug store might be in order before the end of the year.

Using 529s to Pay for Education in 2007. The popularity of 529 Plans resurged in 2007 and the Pension Protection Act of last year eliminated the limit based on Adjusted Gross Income. However only funds used for qualified education expenses are exempt from federal taxation; living expenses, books and supplies are traditionally not covered, so don’t use them to avoid an unwelcome surprise come tax time. It is important to note that some states allow taxpayers to reduce income by $10K if that money is put into a 529 plan.

Francois Hechinger is a tax partner in the Bay Area practice of BDO Seidman LLP, one of the nation’s leading accounting firms. He is based in the firm’s San Francisco office.

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