It's that time of year again when our thoughts turn to how we can save on our taxes, especially during these tough economic times. Here are some tax planning strategies worth considering as 2008 winds down.

The usual year-end advice to accelerate deductions and delay income still holds. Use some caution when accelerating deductions, though. Hawaii state income and local property taxes are deductible for regular income tax purposes; they are not deductible for Alternative Minimum Tax (AMT) purposes. So before making your January state estimated tax payment in December, consider its effect on any potential AMT.

Capital Gain/Loss

The decrease in stock market values presents an excellent planning opportunity. You may find that you have recognized some capital gains this year. For example, you may have sold stocks in the first part of the year before the markets dropped so dramatically. Or you could have some investments in certain mutual funds that might distribute capital gains at the end of this month. It might seem strange that mutual funds might have substantial capital gains in a down market, but consider many mutual and hedge funds have been forced to sell holdings to satisfy redemptions and to buy back their shares. Many of these holdings could have been purchased at very low cost and could generate substantial gains.

Keep in mind, if you own these funds on the dividend record date, you will be taxed on the distribution even if you not own the investment when the fund realized the gain or if you reinvest the dividend. Thus, you could face paying taxes on the gain without having received the cash.

Substantial capital gains could trigger the AMT. Although capital gains are taxed at a maximum of 15 percent for both regular tax and AMT, the presence of substantial amounts of capital gain could push you into AMT by using up your AMT exemption amount.

One way to mitigate this situation is to analyze your portfolio and “;harvest”; some losses. You do so by selling some of your loss positions. Doing so will allow you to offset any realized gains, offset a maximum of $3,000 of other income if your capital losses exceed your gains, and you could carry forward any excess capital loss to offset future gains.

You can harvest losses with minimal changes to your portfolio's asset allocation by using the proceeds of the sales to reinvest in similar companies, bonds or mutual funds. That way if you like your current investment strategy, you could still benefit from future market increases benefiting that strategy.

You must exercise some caution, though. The IRS has something called the “;wash sale”; rule which disallows losses when the same or substantially similar investments are purchased within 30 day of the loss sale. Thus, if you sold a company's stock at a loss, you must wait at least 31 days before buying any of that company's stock. Otherwise the loss will be disallowed.

You can, however, buy another company's stock if it is within the same industry. You also could do a bond swap, where you sell a bond at a loss and then immediately buy another bond of a similar quality from a different issuer.

Similarly, you can sell a mutual fund at a loss while buying another mutual fund from the same family of funds (often without any additional fees) as long as it is not the same fund that you sold.

There's still time to put late season planning techniques into play, but remember to consider your individual circumstances and consult a tax adviser.

  Ken Kretzer is a senior tax manager in the Honolulu office of Grant Thornton LLP. He can be reached at .(JavaScript must be enabled to view this email address)