Year End Tax Planning Strategies
Capital gains and dividends strategies, timing income and deductions, charitable contribution ideas
We are constantly on the lookout for new ways to lower your taxes and want to share some of the more significant law changes, important deadlines, and tax saving suggestions that we feel are important to our clients and friends.
CAPITAL GAINS, CAPITAL PAINS
The good news is the new lower rates available this year. The bad news is the complex rules to keep track of the sales. Long-term rates are capped at 15% except for collectibles (28%) and depreciation recapture (25%) and short-term rates can be as high as 35%. Remember that you must specify which shares you intend to sell or the IRS assumes you are using the first-in, first-out method.
How the gains are actually calculated is rather quite complex as they depend on the sale date. Long-term losses on sales after May 5, 2003 are applied first against post-May 5 long-term gains. Deducting carry-over losses from prior years is extremely complex. Please call us to discuss how the calculations specifically apply in your situation.
Here are some tax efficient investments strategies – minimize portfolio turnover, place investments and real estate that you trade frequently into tax-deferred accounts, also use tax-deferred accounts to rebalance your portfolio in accordance with your asset allocation strategies, avoid wash rules by doubling up purchases or buying/selling similar investments.
Some great year end moves…(1) give appreciated stock to children over age 14 in the 10-15% tax bracket and they will pay capital gains tax at only 5% to generate funds needed to pay for college and (2) give appreciated stock to charity to avoid all capital gains AND get a charitable deduction for the entire amount.
IT'S ALL IN THE TIMING
For income, defer income, delay year end bonuses, and defer billings. For deductions, take the standard deduction one year and itemize the next. This can be especially helpful if you have already, or are expecting to incur, high medical costs which can be deducted only to the extent they exceed 7½ % of your adjusted gross income. Also don't forget to prepay state tax estimates and your January mortgage payment to deduct the interest this year. For charitable contributions, remember they can be deducted in the year the check is mailed.
CHARITABLE CONTRIBUTIONS
For large charitable contributions, consider using the following techniques to not only reduce your income taxes, but to reduce your estate – charitable lead trusts, charitable remainder trusts, and private family foundations.
DIVIDENDS
Dividends taxes at the 15% rate are not counted as investment income when computing the amount of margin interest you can deduct. Also dividends from the following sources do not qualify for the 15% rate – master limited partnerships, real estate investment trusts, preferred stocks that are debt instruments, employee stock ownership plans (ESOPS), certain mutual funds, and pass-through income from S-Corporations.
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