Tips for Year-End

By Nancy Zambell, Contributing Editor, Financially Fit

It's the time of year when our thoughts turn to holiday festivities and, yes - tax planning!

We hope you had a great Thanksgiving holiday - good food, good company and good conversation. I did my part to usher in a profitable retail season by shopping with my best friend on Black Friday. And while I love to treat myself to the season's fun and merriment, my guilty conscience won't let me freely indulge in too much end-of-the-year revelry without nudging me to make peace with the tax man. And that means a little time and attention must be paid to minimizing that dreaded tax bite ahead.

To help you make your holiday season brighter, here are a few tips that may assist you in saving a little extra when it comes to paying the tax piper:

Review your investment portfolio. If your taxable accounts show a net gain for the year, you might consider sheltering some of that profit by weeding out a few of your unprofitable investments by careful selling. That way, you can take a loss to offset capital gains and after that, up to $3,000 of ordinary income. Any excess losses can be carried forward to future tax years. You most likely will receive the greatest tax savings from first selling your short-term losses, since they will be at the head of the line in offsetting short-term gains that may increase your ordinary income tax rate.

You might also consider rebalancing your portfolio by taking some profits off the table by selling all or some portion of your profitable investments. And it would be a good time to review your unprofitable holdings to determine if they are still worth keeping or if it is time to face the music and dump them.

Time your mutual fund purchases and sales. Buy funds after their big end-of-the-year distributions are made; that is, after the ex-dividend date. And if you are looking to sell a fund, do so prior to this date. Just as with stocks, you can get rid of losers and help offset any other investment gains at the same time. But remember that you will still owe ordinary income taxes on any previous interest and dividends from the investments in the fund, as well as capital gains (long- or short-term) from any appreciated investments. And don't forget to take into consideration any redemption fees levied by your fund company and your broker.

If you are going to be in a different tax bracket next year or just want to reduce your taxable income this year, you may want to delay income or accelerate certain deductions.

Here are some items you may want defer or delay in order to postpone income to the following tax year:

• Compensation
• The sale of properties with capital gains. Or, you may decide to receive installment payments in lieu of a lump sum.
• Bonuses you may receive at year-end
• The receipt of other-than-required distributions from retirement accounts

If you believe you will need extra deductions this year, consider accelerating them by:

• Paying medical expenses in December rather than January, if that will help you meet the requirements for that deduction
• Prepaying alimony payments early
• Giving next year's planned charitable contributions in this tax year. Remember that you can donate appreciated assets, such as stock, at its full value, not what you originally paid for it. There are a few important changes to charitable deductions for 2006: a) Clothing and household goods must be in good condition or better; b) Non-cash donations worth $500 or more now require an appraisal, up considerably from the previous $5,000 limit; and c) For 2006 and 2007, retirees, 70 ½ or older, can now make tax-free distributions of up to $100,000 a year from their IRA's, directly to a charity - whether or not they itemize their deductions. Those deductions could effectively reduce your adjusted gross income, which might have the added benefit of decreasing the taxes owed on Social Security benefits, or increasing deductions for medical expenses.
• Prepaying deductible interest

Maximize contributions to retirement plans, including 401(k)'s, IRAs and Roth IRAs. You can reduce your taxable income by increasing your contribution to your employer-sponsored 401(k) plan or by receiving a tax deduction from your contribution to a traditional IRA, which will defer the taxation on that contribution - and its earnings - into future, probably lower tax-rate years. An after-tax contribution to a Roth IRA will set you up for tax-free distributions on that contribution and its earnings in later years.

Make sure you are using the money you set aside for medical expenses in your flexible spending account. Or you will lose it. If necessary, move up your planned doctor's visits into this tax year.

Consider increasing your non-charitable gifts. You may now gift up to $11,000 ($22,000 for married couples) to as many individuals as desired without incurring gift taxes.

Ask your employer to increase your federal tax withholdings for the rest of the year if you believe you will owe substantially more than you have paid in. By doing this before the end of the tax year, you may reduce any penalties for paying in too little thus far.

Lastly, be aware of conditions that may trigger the Alternative Minimum Tax, which can seriously add to your tax bill:

1. Excessive personal exemptions
2. Large medical expenses deductions
3. Home equity loan interest in which the loan was not used to buy, build or improve your home
4. Large deductions for state, local, personal property and real estate taxes
5. Exercising substantial incentive stock options
6. Large miscellaneous deductions including unreimbursed employee business expenses

A little planning now may prevent a lot of hurt later. So take some time amid your holiday fun to pay attention to this important task and you may have a little more money in your pocket - for more fun - at year-end!

Until next week…

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm


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