Answers For Year-End Questions

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BERLIN – There’s lot of reasonable questions as we approach the end of the year and here are some smart year-end moves and a sensible long-term strategy could minimize your bill.

Will I pay the AMT? The Emergency Economic Stabilization Act, signed into law in October, applies another one-year "patch" to the alternative minimum tax, but that probably won’t help if your income is from $200,000 to $1 million. Falling in that income range, exercising incentive stock options or taking large tax credits or deductions could make you subject to the tax.

Should I accelerate deductions or income? The normal advice is to move up deductions while pushing back income to a future tax year. The reverse may be preferable, though, if you’re subject to the AMT or expect tax rates to rise. The Obama administration may act to head off the scheduled expiration of today’s rates at the end of 2010, and higher taxes could be needed to reduce the budget deficit and pay Medicare and Social Security benefits to retiring baby boomers.

What can I do to manage capital gains? You could sell losing stocks to offset profits on winners, which could cut your net gain, and excess losses might reduce your ordinary income by as much as $3,000 a year. But the possibility that capital gains rates will rise in 2009 could alter this strategy too.

Should I still "max out" my retirement plans? Investing as much as possible in tax-advantaged plans probably makes sense even if rates rise, because of the potential benefit of long-term investment compounding. But don’t miss contribution deadlines, which for some plans fall as early as Dec. 31.

Would I benefit from giving to a 529 College Savings Plan? Tax-free growth and distributions make this the best way for most families to save for education expenses. Contributions also reduce your taxable estate, and annual gifts of up to $12,000 ($24,000 for couples) or a one-time, five-year donation of as much as $60,000 ($120,000 for couples) for each beneficiary avoid the gift tax.

How can I see to it that my investment strategy is tax-efficient? It’s wise to employ a team approach, including your financial advisor, your tax advisor and any other experts that you rely upon to set and execute your tax and investment strategies. (A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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