Taxpayers have only two days left to try to find alternatives to paying taxes. The state treasurer and a local investment professional have several suggestions that could reduce the amount of tax liability that will be due on April 15, 2007.
Treasurer Lynn Jenkins suggests that taxpayers take advantage of the Kansas 529 Education Savings program to help reduce their tax burdens.
Kansans have until Dec. 30 to contribute to Learning Quest, the Kansas version of a federal 529 education savings plan. Contributions made by mail must be postmarked Dec. 30, 2006. On-line contributions at learningquest.com must be made by 3 p.m. on Thursday, Dec. 29, 2006.
“Kansas taxpayers can receive a state adjusted gross income deduction of up to $3,000 per child for 2006,” Jenkins’ spokeswoman Jenalea Linn said, referring to a single person’s potential deduction. The deduction is up to $6,000 if married and filing jointly.
“This benefit is in addition to the federal and state tax benefits of tax-deferred growth and tax-free withdrawals for qualified educational expenses,” Linn said.
The Learning Quest rules will change in 2007, according to Greg Seibel of the Edward Jones investment company in Emporia.
Next year, Kansans will be able to make contributions to 529 accounts in any state and deduct them on their Kansas income tax returns. If, for example, a Kansas resident has established an account for a grandchild in Virginia, qualified contributions made to the Virginia account can be deducted from their Kansas income tax returns. Kansas was the second state in the country to pass a law allowing that flexibility, Seibel said.
Seibel has been busy this week, helping clients who need to reduce their tax liability before the end of the year.
“The biggest thing we’re doing is making year-end gifts in-kind,” Seibel said. “The second thing we’re doing is evaluating where people are, from a tax standpoint.”
In-kind gifts — assets such as stocks or real estate — are a popular and profitable way to donate money and save money simultaneously. Such donations often are made to universities, churches and charities. A stock purchased at $20 per share and currently worth $40 per share would be subject to capital gains tax if it were sold. If that same stock is donated to a c\501(c)(3) charity, the donor would pay no capital gains tax and the charity would be able to sell the stock at its current market price. The donor can use the current market value as the donation value for his or her income tax.
“The advantage is that you haven’t had to sell it,” Seibel said. “If you’re writing a check, you’ve already paid tax on that money. ... (Donating appreciated stock or real estate) is a big bonus because you save paying the tax on the gain. It works very well. In fact, most of the bigger gifts are given that way.”
He said that such donations also allow donors to give “off the top of their net worth” rather than make a donation that affects their cash flow.
Seibel and other investment professionals also have been working this week with clients who need to determine whether they need to sell a losing investment to offset gains from a successful investment.
Once-popular stocks, such as gold and silver or technology stocks, have been among the most-used options this year for taxpayers who need to take a loss to offset gains taken on better investments.
“People get caught on what they bought when things were popular,” Seibel said. Sometimes the best use of those bad investments is selling them to lessen the capital gains bite on the profitable investments.
He said that gifting also needs to be done before the end of the year for the 2006 income taxes. People who want to reduce their incomes and won’t be harmed by having less ready cash can give $12,000 per year to anyone, Seibel said. Couples can give $24,000 to another person. Such gifting is especially popular among grandparents and others of similar age.
“You can’t take it with you,” Seibel said. “You might as well give it away and watch them enjoy it. You get more thank-yous when you’re alive. It’s just once the year rolls by, you’ve lost that annual gift” opportunity.
The gifts are not tax-deductible for the donor, but they also do not represent a tax liability to the recipient.
He cautioned, however, that the in-kind donations so beneficial when giving to charities may not be the best option for a donation to an individual. Because individuals are not charities recognized by the Internal Revenue Service, a person who receives a $12,000 gift in stock or real estate would have to pay capital gains on the gift.
“What can be done today, they now allow what’s called a ‘transfer on death deed,’ where you basically put a beneficiary” on the deed or stock, he said. That property would transfer, without tax liability, to the beneficiary. Adding the names of beneficiaries directly to a real estate deed, for example, would create tax liability, where a TOD would not. Seibel recommended consulting an attorney or financial professional to handle the details of TOD arrangements.
Taxpayers also may want to start thinking about Roth and traditional IRA investments. Decisions on whether those investments would be helpful, and subsequent payments into those accounts, do not have to be made until the 2006 income taxes are paid, or April 15, whichever comes first.
For now, however, profits, losses, gifts, education accounts and charitable donations need to be considered quickly.
“Once Dec. 31 comes around, you can’t back up and do any buying or selling in arrears,” he said. “Once the clock strikes 12, we’re into ’07 and moving on into next year.”