By Glenn Dahlke
Yes, its that time of year again, time for every financial column to drum into your head all the year-end investing tax tips. It’s the equivalent of your list to Santa. You either take care of it by year-end or you take your chances. Consider yourself warned.
Take Your Losses – Losses are never a thing of beauty, but they can become palatable at this time of year. Even if you’re convinced that the paper loss is only a temporary situation, you should still consider selling. You can buy the position back in 31 days to avoid what’s called a “wash sale.”
Netted out against long-term capital gains, you can claim $3,000 of long-term capital losses on your current income tax return, with the remainder being carried forward into future years.
Check With Your Mutual Funds for Long Term Capital Gain Distributions – Many Mutual Funds make long-term capital gain distributions before the end of the year. Even if you reinvest them back into the mutual fund, they are still taxable distributions. By calling the mutual fund company (or your broker), you should be able to get at least an estimate of what those distributions will be.
If there are distributions, go back and read the tip about losses.
Defer Capital Gains – If you can defer taking your capital gains until January, do it. If you take them today, the tax will be due April 15th, 2009. If you wait until January, the tax won’t be due until April 15th, 2010. You decide.
Maximize Your 401(k) Contribution – You know this was a New Year’s Resolution last year! December 31st is the final day to make good on it.
Fulfill Charitable Pledges With Low Tax-Basis Stock – Why give cash when you can siphon off some of that ExxonMobil you’ve owned for 20 years? You can claim a deduction for its full value – not simply what you paid for it – and avoid the capital gains tax as well.
Of course if you’re thinking about giving away stock with a tax basis higher than its current market value, think again. Here, you’re better off selling the stock, taking the loss, then giving away the cash.
If 70 ½ Or Older Make Sure You’ve Made The Required Minimum Distribution From Your IRA – Distributions from Individual Retirement Accounts (IRAs) must be made by year end. Make sure you’ve included all your accounts in calculating your minimum distribution. Mistakes can often occur if you transferred IRA accounts during the year.
Remember That The End of One Year Is The Beginning of A New Year – Tax planning and investing are year-round activities. As you move into the new year, make a list of things to do early in the year. Increase your 401(k) contribution or start a systematic investment program. Leaving it all to the end of the year can put a dent in both your cash flow and your holiday cheer.
Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 29 years in the investment business.