Year-End Tax Planning Can Lower 2011 Tax Bill

Nov 2011

With the holiday season fast approaching it is the very opportune to think about year-end tax planning. No one wants to pay more taxes than they are legally required to pay and in order to accomplish that objective, it is necessary to take action prior to December 31, 2011.

You should begin by looking at your portfolio to determine if there are any opportunities to recognize any losses. Tax-loss selling is a simple way to use fluctuations in the market to your advantage. The rules regarding utilization of tax losses are relatively simple. Capital losses can be used dollar for dollar against any capital gains. These losses can be used to offset capital gains from the sales of stocks, mutual funds or capital gain distributions from mutual funds. Capital losses can only be used from sales in taxable accounts.

If the amount of your capital losses exceeds the amount of your capital gains, you are able to use $3,000 of the losses against your current income. The balance carries forward to future years and used in the same manner. For example, assume your cost basis in an investment is $50,000 and it is sold for a $15,000 loss. During the year you have $5,000 of capital gain distributions from mutual funds you own. Since the loss is greater than the gain you will be able to offset the entire $5,000 capital gain distribution. The remaining loss ($10,000) is used as follows: $3,000 will reduce your 2011 income; the balance, ($7,000) is carried forward to next year.

If you take advantage of tax-law selling you also must be aware of the wash sale rules. This rule provides that you cannot repurchase the same security that you sold within 30 days after the sale. There is no limitation on purchasing a different investment as long as it’s not the same or identical investment.

In 20l1, the long-term capital gain rate is zero percent for taxpayers in the 10 or 15 percent tax bracket. There are no wash/sale rules applicable to gains so this means that a security could be sold and repurchased the same day and the tax will be avoided provided you are in the 15 percent tax bracket.

With the recent market downturn, it may also be appropriate for many people to convert their IRAs to a Roth IRA for tax purposes. A conversion is treated as a taxable distribution and therefore the entire amount converted is taxed. Conversions made before December 31, 2011 can be reversed without any tax consequence by October 15, 2011.

If you are 70½ or older and are considering making a charitable contribution, you are also eligible to have your contribution made directly from your IRA. Although you cannot claim a deduction for the contribution, you will not have to report the distribution as income. In certain circumstances, this can result in a significant net tax savings.

Tax free gifts can be made by December 31, 2011 of $13,000 per person. If you are married, you can double the amount of the gift. Gifts do not have to be made to family members.

This time of year, most of us are very busy preparing for the Holidays. But with a little year-end tax planning, you will help lower your 2011 tax bill and make April 15, 2012 a little better.

Happy Holidays


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