State Income Tax Deduction for 529 plan contributions

Several states have laws allowing a tax deduction for contributions (up to a limit) to a 529 plan. Pennsylvania’s law, enacted in 2006, allows a deduction for up to $12,000 per beneficiary for each PA taxpayer. For example, a taxpayer with 2 children can deduct $24,000 from that year’s state income tax return. A married couple with two children could deduct up to $48,000 total if each spouse has $24,000 of PA taxable income. This can be in any state plan (not just Pennsylvania). You get a reduction in your state tax bill in the current year—as well as tax-deferred investment growth toward college expenses.

Capital Gains Payouts by mutual funds may come with a tax bite

Many international, small-company, and value-based mutual funds expect to make big taxable distributions to shareholders this year. That could mean correspondingly large capital-gains taxes if you hold these funds in taxable accounts; you must pay taxes on the distributions, even if you reinvest them in the same fund. Consider delaying purchases until after the distributions (your advisor can tell you when). But selling out of a fund just to avoid the distribution could create a bigger tax bite.

The AMT: minimizing the ouch

The painful Alternative Minimum Tax is now most likely to affect those with income between $100,000 and $500,000. Though there is much talk of eliminating the AMT, I am not betting on it for 2007. To avoid being subject to the AMT or to minimize its effects, consider deferring deductions, such as fourth-quarter state and local taxes, interest payments, and medical payments until next year. If you anticipate a reduction in your income from a job change or retirement, or you are moving to a low-tax location, consider deferring income to next year. If you invest in municipal bonds, avoid those that pay interest subject to the AMT. In any case, consult your advisor on the merits of these strategies for your particular situation.

On The Other Hand

If you will not be impacted by the AMT you may find it beneficial to accelerate some of your deductions to lower your current year tax exposure. How do you do this? Simple ideas include paying your January mortgage payment in the last week of December; if you pay estimated state and local tax payments (4th quarter payments are due in January) consider paying them in December. Your advisor can help determine whether this makes sense for your situation.

Maxing Out your 401k or IRA

Do you, like most people, leave your 401k contribution percentage the same each year? But the limit has increased each year since 2001. Consider increasing your contribution in November and December to reach this year’s $15,500 limit (plus $5,000 “catch-up” for those over 50). Consider contributing to the limit on any IRAs, as well. Limits and participation requirements vary; get specifics from your advisor. The dual benefit is lowering your current year tax bill while improving your long term retirement picture.

A Simple Strategy for gifts

What if you could receive an income tax deduction in 2007 for giving to charities in the future? You can with a donor-advised fund (there are many to choose from). You get a current-year deduction for the total amount you invest. As with other mutual fund investments, there is also potential for growth, and you can make gifts whenever you like, even years from now. The fund does the paperwork, too.

Author: David Jeter, CFP®, Allegheny Financial Group, November 2007


Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment.