With only a few days left in the year, there are still some moves you can make to save taxes, but you must act quickly!
Harvest Losses It has not been a stellar year in the stock market, so if you have some positions with unrealized losses, sell them and capture the loss for tax purposes. You can deduct up to $3,000 of losses against your income; if your losses exceed that, you can carry forward the excess to future tax years. What if you like the stock or mutual fund? Buy something similar. After 30 days you can sell the surrogate stock/fund and buy your first choice (If you buy it back sooner, the "wash sale" rule will void your tax loss).
Give it Up You can make a donation to charity and deduct the fair market value. There are a multitude of options: cash, check, credit card, cars, clothing (or other property), art, stocks, mutual funds, and even a direct transfer from an IRA (only for seniors over 70 ½). There are some limitations, and you must keep receipts to verify. Unfortunately, donating your time is not deductible.
Make Tax-Free Roth Conversions Or IRA Withdrawals If your income is lower due to job loss or early retirement, and you have significant itemized deductions (mortgage interest, state taxes, charitable, etc.) you may be able to convert or withdraw and incur zero tax.That is, you should convert/withdraw an amount equal to your itemized deductions and personal exemptions, less whatever other income you received during the year.
Retirement Plan Contributions Still the best tax break for most Americans. If you have not maximized your 401(k), IRA or other retirement plan contributions, do so. For some (401-ks and other employer-sponsored plans), this must be done by December 31; for others (IRAs & SEPs) you have until April 15.
HSA and FSA You should max out Health Savings Account contributions or fully utilize your Flexible Spending Account in order to save taxes and pay for medical costs. This is applicable only to those who have such plans.
Energy-Efficient Home Improvement If you can get new windows, doors, a/c or heating units installed before December 31, there is a small tax credit available ($500). Read up on all the rules and technical details.
AMT The Alternative Minimum Tax is confusing, but if you make quarterly estimated tax payments, run "what if" tax calculations to determine whether you should make your state income tax estimated payment in December or January. If you are not subject to AMT in 2011, make it in December; but if you are, wait until January.
© 2011 Cal Brown, CFP, MST, author of When Life Strikes: Weathering Financial Storms
Cal Brown, CFP, MST, author of "When Life Strikes: Weathering Financial Storms," has over twenty-five years of experience in the financial services field. He received his master of science in taxation (MST) from American University in Washington, DC, and his undergraduate BSBA degree from the University of Arkansas. Cal is currently an adjunct professor in the MST program at American University, teaching estate planning. Cal is vice president of planning for The Monitor Group in Virginia, a wealth management firm working with over 250 clients and managing approximately $500 million in assets.
