Take Advantage of Tax Law Changes

It may seem far off still, but it’s not too early to begin preparing for tax season. In fact, a number of significant tax laws passed by Congress this year will give investors the opportunity to take advantage of a variety of tax breaks — if they know where to look.

To help taxpayers gain the upper hand in their pursuit of saving strategies, A.G.

Edwards has written a simple guide offering ideas for better preparation for the upcoming tax season. The newly published edition of the company’s annual tax strategies report, “Tax Saving Tools to Help You Keep More of Your Nest Egg,” provides easy-to-understand tax-saving strategies for investors of all types.

Here are a few ideas to consider that have resulted from recent legislation changes:

Rethink Your College Savings Strategy. Because the tax rate on eligible dividends and long-term capital gains is 0% for taxpayers in the 10% and 15% brackets from 2008 through 2010, you may want to consider gifting appreciated securities to children or grandchildren who will be 18 or older when they sell them. This strategy could benefit a child who is preparing to start college. During those three years the child may be able to sell the securities and potentially incur no capital gains tax. Even if the student sold the securities before 2008, the gain would most likely only be taxed at a rate of 5%.

Beware of “Kiddie Tax” Changes. A child who has not yet reached the age of 18 (increased this year from 14) and has at least one living parent at the end of the tax year may be subject to the kiddie tax. This rule states that any unearned income for such a child in excess of $1,700 (in 2006) is generally taxed at his or her parents’ marginal rate. Because of the kiddie tax rule, holding investments in a child’s name has had only limited benefits. With the age being raised, there is even less upside to such an approach. As a result, you may want to review the strategies you’re using to save for education and other goals through various savings vehicles such as custodial accounts and consider using Education Savings Accounts (ESAs) and 529 plans instead, as these will allow your investments to grow tax deferred until you need to use the funds.

Prepare Now for IRA Conversions. Beginning in 2010 investors at any income level may be able to convert traditional IRAs to Roth IRAs, which may create an especially attractive saving opportunity. For example, if your current income disqualifies you from contributing to a Roth IRA, if your income is too much for you to make deductible contributions to a traditional IRA, or if your traditional IRAs contain only nondeductible contributions, you may benefit from the new conversion opportunity.

These are just a few of the tax-saving ideas detailed in our new report. To receive your own copy at no cost or obligation, you can call our office at (914) 948-7300 x349.

A.G. Edwards does not render tax or legal advice. Consult a qualified professional for questions regarding your specific situation. A.G. Edwards generally acts as a broker-dealer, but may act as an investment advisor on designated accounts, and the firm’s obligations will vary with the role it plays. When working with clients the firm generally acts as a broker-dealer unless specifically indicated in writing. To better understand the differences between brokerage and advisory services, please consult “Important Information About Your Relationship With A.G. Edwards” on agedwards.com.

This article was provided by Peter Zagrobelny, AAMS (peter.zagrobelny@agedwards.com) of the White Plains branch office of A.G. Edwards & Sons, Inc., Member SIPC

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