WHAT’S CHANGED — WHAT’S THE SAME?

Just as changes in the tax law can affect your tax situation, so can changes in your life. Have you married or divorced this year? Your marital status affects your filing status, and your filing status and income will determine your tax bracket.

Have you added a new child to the family, or has a grown child left the nest? If so, you may gain or lose an exemption for a dependent. In 2008, each exemption you claim will reduce your taxable income by as much as $3,500.

As you begin your year-end tax planning, also consider these questions.

Will your income be substantially different from last year’s?

Will you have any capital gains or losses this year?

Did you start a business this year or do you intend to?

Did you retire this year or are you planning to retire soon?

REVIEW FILING STATUS Filing jointly usually results in a lower tax bill for a married couple, but not always. Depending on your respective itemized deductions and income, you could owe less tax by filing separately. Filing as a head of household is usually preferable to filing as a single taxpayer because the tax brackets are more favorable. You may be eligible if you are unmarried and a qualifying child or dependent relative lives with you for more than half the year (or in certain other situations). Various requirements apply.

YOUR 2008 TAX PAYMENTS

Most taxpayers have to make payments toward their federal income-tax liability during the year. Employees generally pay their taxes through payroll withholding. If you have non-wage income — rental income, self-employment earnings, alimony, investment income, etc. — you generally must make quarterly estimated tax payments (or have your employer take more tax out of your earnings to cover the tax on your non-wage income).

CHECK WITHHOLDING AND ESTIMATES You can avoid an underpayment penalty when you file your taxes by paying enough taxes during the year. It’s smart to see where you stand with your withholding and/or estimated tax payments as year-end approaches. You might want to ask your employer to withhold more income tax from your remaining 2008 paychecks if it will help you avoid a penalty. An equal part of the total income tax withheld during the year will be considered paid on each quarterly installment date.

YOUR TAX BRACKET

Unless there is a change in the tax law, the individual income-tax rates stay the same from year to year. However, the IRS adjusts the tax brackets annually for inflation. You can see the 2008 brackets in the accompanying rate table. Once you know your tax bracket, you can project the tax effect of various planning strategies.

ALTERNATIVE MINIMUM TAX

When reviewing your tax picture, it will be important to determine whether you are likely to be subject to the alternative minimum tax (AMT). Although the AMT system was originally aimed at very wealthy taxpayers, recently it has been a problem for many more taxpayers.

The AMT is designed to ensure that taxpayers who use certain deductions, credits, and exclusions to reduce their regular tax liability still pay a minimum amount of tax. Some of the items that could trigger the AMT are:

A large deduction for state income taxes

The exercise of incentive stock options

A higher-than-average number of dependency exemptions

Significant amounts of tax-exempt interest from “private activity” municipal bonds

A large capital gain

A large deduction for unreimbursed employee business expenses or miscellaneous deductions

Interest on a mortgage not used to buy, build, or improve your home

Computing AMT is complex. We can help you evaluate your potential exposure.

PLAN FOR POTENTIAL AMT You may want to delay exercising incentive stock options or recognizing a large capital gain if these actions will make you subject to AMT. But don’t let tax considerations alone influence your investment decisions. Consider pushing expenses that are deductible for regular tax purposes but not for AMT purposes — such as state and local taxes and miscellaneous itemized deductions — into a non-AMT year. Accelerating income into an AMT year may be advantageous if you expect your regular income-tax rate to be higher than the 28% AMT rate.