Best Tax Moves to Make in 2008

You know that old saying about taxes? No, not the one that equates their inevitability with us shuffling off this mortal coil.

The truism that really fits is, "The only constant is change."

You can thank, or blame, federal lawmakers for that. While politicians' penchant for making tax law changes does pose problems for us taxpayers, with a little planning you still can save yourself some tax dollars.

The best tax moves to make in 2008

1. Keep an eye on the "kiddie tax"
2. Zero out capital gains
3. Conserve energy
4. Pay attention to phaseouts
5. Save for retirement
6. Pay Uncle Sam the appropriate amount
7. Keep an eye on Congress

1. Keep an eye on the 'kiddie tax

Despite the name, the kiddie tax isn't a tax break for young earners. In fact, it costs younger investors more.

The law was designed to keep parents from moving assets to a child's name as a way to avoid the adults' higher tax rates. Under the kiddie tax, a child's unearned income is taxed at their parents' highest tax rate. And in 2008, more kids are going to face this tax.

It used to be that once a child turned 14, any earnings held in his or her name were taxed at the child's usually lower rate. For 2007 filings, the age at which the youngster's tax rate applies was hiked to 18.

In 2008, children must be 19, or 24 if they are full-time students claimed as dependents, before their lower tax rate can be used.

"Those children who are not subject to kiddie tax in 2007, but who expect to be affected by it next year, should sell appreciated properties before end of this year," says Bob D. Scharin, RIA Senior Tax Analyst from Thomson Tax & Accounting. "That way their capital gains will be taxed at their own tax rate, probably 5 percent."

But if the young investor owns assets that are showing a loss and expects to face the kiddie tax next year, it might be wise to wait to sell. In this situation, says Scharin, selling in 2008 those assets that have lost value can offset any gains. That could reduce the amount of money that's subject to the higher kiddie tax rate.

2. Zero out capital gains

Investors of all ages always need to keep an eye on capital gains. For some, 2008 will be a very good tax year.

Next year, individuals who are in the 15 percent rate bracket can take advantage of a zero-percent rate instead of the current 5 percent rate on capital gains.

For 2008, the 15 percent tax bracket tops out at $65,100 for joint filers, at $32,550 for single taxpayers. Remember that the zero rate will apply to the sale of long-term gains, i.e., those assets that are owned for more than a year.

Previously, parents would give assets to their children to take advantage of lower capital gains rates, but this option has been negated by the expanded kiddie tax. However, in 2008 you might want to consider giving to your parents instead.

"It's still available to other lower income earners, such as retirees," says Scharin. "So affluent kids of retirees might want to give mom and dad some appreciated assets to sell. The holding period of the recipient is the same as the holding period of the donor, so if I held stock for two years and gave it to my mother, she could turn around and sell it the next day and get the long-term capital gains rate."

Of course, the usual investment provison remains: Make investment moves that are appropriate for your overall portfolio and financial plans, not just to take advantage of a perceived tax benefit. In this case, you want to make sure that it makes sense to hold on to an asset a bit longer.

3. Conserve energy

With all the attention on global warming, it's no surprise that tax writers also have gotten into the environmental act.

Some home improvements are still available for a tax credit in 2008. But they are the more expensive options involving converting your house's heating or cooling system to solar power. Still, if you are considering a major HVAC overhaul, be sure to look into this alternative.

You also can still get some tax breaks for buying a fuel-efficient hybrid auto in 2008, as long as it's not a Toyota. The tax credit for that automaker's hybrids was phased out last year. But savings of up to several thousand dollars remain for dozens of other makes and models.

4. Pay attention to phaseouts

Conventional wisdom for taxpayers who itemize is to take as many deductions as possible, typically at year's end when you're making last-minute tax moves. But thanks to some tax law changes, some higher tax bracket filers might find it more valuable to push those deductions into 2008.

When a taxpayer's adjusted gross income, or AGI, hits a certain level, his or her itemized deductions are phased out. On 2007 returns, the threshold was $156,400 for all filing statuses except married filing separately, which is $78,200.

But next year, the phaseout won't be as costly for two reasons.

First, the phaseout levels are indexed for inflation. In 2008, the income thresholds will be $159,950 ($79,975 for married filing separately taxpayers).

More importantly, the 2008 reduction amount is smaller.

The phaseouts took effect in 2006, but the percentage by which tax deductions are reduced has been dropping. What began as a 3 percent phaseout becomes, in 2008, a 1 percent reduction of itemized deductions. That means, says Mark Luscombe, principal federal tax analyst with CCH, affected taxpayers will see less of their income taxed and their 2008 deductions count for more.

5. Save for retirement

Year in and year out, some advice always applies. Saving for retirement is one such instance.

In 2008, you can contribute up to $15,500 to your 401(k) or similar employer-sponsored plan. You can add another $5,000 if you're age 50 or older.

Even if you have a 401(k) at work, consider opening an IRA or contributing to an existing account. Your choice of a traditional IRA or a Roth account depends upon your individual financial situation. In some cases, contributions to a traditional account are deductible from current taxes; with a Roth, you'll get to eventually withdraw the money tax-free.

In 2008, you can put up to $5,000 into a Roth or traditional IRA and another $1,000 if you're 50 or older.

6. Pay Uncle Sam the appropriate amount

You might be able to come up with more money for your retirement funds if you're not overpaying Uncle Sam via payroll taxes.

Under the IRS's pay-as-you-earn tax system, you should be paying just the amount of tax owed on your income. To do so, you might need to adjust paycheck withholding, either up or down.

A good measure is last year's tax return. Did you end up owing or get a huge refund? If you did, then you need to tweak the Form W-4 you gave to your boss. The IRS has an interactive withholding calculator that can help.

If the changes mean you get more money in each paycheck, you're essentially getting your tax refund year-round in regular increments. Now you just need to put the money to good use.

"You can invest the money, contribute to one of the many tax-advantaged retirement vehicles available or buy things you need without racking up credit card debt," says Luscombe.

7. Keep an eye on Congress

Remember those home energy-efficiency improvements? For 2006 and 2007, the combined credit limit was $500 for many relatively simple residential upgrades. If you met the maximum already, but would like to make some more residential upgrades, you might get another chance at this tax break in 2008. There is some talk on Capitol Hill of extending the original tax credits.

Several other popular tax deductions also have a good shot at being revived. Write-offs for state and local sales taxes, teacher's expenses and tuition and fees expire on Dec. 31, but a bill has been introduced to extend them through 2008.

Another more specifically-targeted tax break, the deduction by some homeowners of their private mortgage insurance, or PMI, payments, also is in line for continuation.

And the record-setting pace of foreclosures has led to possible new tax laws. A proposal that would keep foreclosed-upon homeowners from facing taxes on forgiven debt is moving through Congress.

The timing of any future tax breaks is critical. Congress typically, but not always, makes any late-passed laws retroactive to the full tax year. So keep an eye on Capitol Hill in 2008. Staying on top of tax law changes could pay off at filing time.