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The Economy Is Down—Bring Your Tax Bill Down With It

These stressful economic times might offer a few short-, mid- and long-term tax planning strategies that will help alleviate your tax bill. Losses are never a good thing. However, when it comes to your business, you might be able to turn them into refund opportunities. Here are a few ways that you can turn this economic downturn into a favorable tax position.

Loss harvesting

Although capital losses in excess of capital gains are limited to $3,000 in the current year, capital losses are carried over indefinitely to offset future capital gains. Down markets present an opportune time to "harvest” these losses for when the market will inevitably make its comeback. It's highly likely that the capital gain rates will be higher when the market recovers. This will only make the harvested losses even more valuable.

Take an ordinary loss on Section 529 plans.

If the value of the assets in a Section 529 plan has fallen below the value of the assets when you contributed to the plan, you might be able to fully liquidate the plan and take an ordinary loss. This will give you the opportunity to reinvest the proceeds in another 529 plan without waiting 60 days to do so. Please note that the ordinary loss will be treated as a miscellaneous itemized deduction subject to the 2% of AGI limit. This isn't a viable option for those that are subject to AMT. See "Are IRA or Section 529 Plan Losses Deducible?"

If you discovered that some of your investments were stolen in fraud-related schemes (e.g., Madoff, Petters), recover the taxes paid on fictitious earnings.

Theft losses are generally only deductible when discovered. Therefore, if a theft loss is discovered in 2008, there are two potential courses of action. The first is to amend your 2005–2007 returns to recover the tax paid on fictitious earnings and claim a theft loss in 2008 (however, this method might not hold under an IRS audit). The second option is to forego the amended returns and claim a theft loss in 2008 under a special safe harbor procedure enacted by the IRS. Under either category, the theft losses will reduce ordinary income and, for some taxpayers under new rules, be carried back up to five years and carried forward for 20 years.

Claim special tax treatment for mortgage forgiveness.

Under most circumstances, cancellation of debt results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of debt forgiven on a principal residence may be excluded from income. This applies whether or not the mortgage was partially or wholly forgiven in 2008.

While we hope your 2008 or 2009 has been profitable, the above represent some potential tax benefits that might help reduce the severity of certain losses.

For further information please contact Tara Wells at 312-980-3277, Mike Calahan at 312-980-2996 or your Blackman Kallick representative.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.