Year-End Tax Planning

We know it doesn’t sound like fun, but a little advance planning will almost always help you reduce the taxes you owe.  Here are some maneuvers that are especially useful come year’s end.  Remember to always discuss important financial decisions with your tax professional.

TIME YOUR MUTUAL FUND BUYS AND SELLS:  If you own appreciated fund shares held over 12 months and are contemplating selling before year’s end, sell before the December dividend.  This way, your entire gain will qualify for the 15% rate.  If you wait, part of your dividend may consist of ordinary income.  You’ll owe up to 35% on the ordinary part.

REVIEW YOUR INVESTMENT ACCOUNTS NOW:  Many mutual funds managers have needed to liquidate positions to provide liquidity.  Sometimes these “sells” create unrealized gains, even though the investor may not receive a distribution.  The combination of lower-year-end values and un-distributed (although taxable) dividends by the fund companies creates a very undesirable event.  Steps that can be taken to assist in managing this potential event would be to review the gains and losses year-to-date and determine when gains are to be paid for the rest of the year.  If you don’t have enough losses to off-set the gains, you may want to consider selling positions in which there is a loss.  Conversely, if you have long-term losses, you may want to consider selling funds or stocks with long-term gains.  Of course, this issue doesn’t apply to shares held in tax-exempt accounts like IRAs and qualified retirement plans.

GIFT WHILE SHARE PRICES ARE LOWER:  This strategy allows you to gift more shares for the $12,000 per donor per recipient.   Be aware that payments of tuition and medical expense made directly to the provider are not subject to gift tax.

FLEXIBLE SPENDING ACCOUNTS:  Previously the balances in these accounts had to be used by December 31.  If your employer amended its plan to allow, the balance may now be utilized by March 15, 2009.  Be sure to schedule medical, dental and vision appointments prior to that date.

TAX LIABILITY:  Review your tax liability position and determine whether to reduce your payroll tax withholding or adjust any estimated tax payments.  You don’t want to be in a position in which you will be penalized for underpaying taxes, nor do you want to give the government an interest-free loan.

CATCH UP YOUR 401(K) CONTRIBUTIONS or SET UP A TAX-FAVORED RETIREMENT PLAN NOW:  If you are a participant in a 401(k) plan, make sure that you have contributed the maximum that you are allowed prior to the end of the year. If you are a business owner, recent tax law changes have given small-business owners better retirement plan options.  However, to reap these rewards, you generally must set up a plan before the end of the year.

BE SURE TO APPLY FOR SOCIAL SECURITY NUMBERS FOR ALL DEPENDENTS:  Otherwise, the dependency exemption on your tax return may be disallowed.

If you have questions about this article, please contact John Miller at Comerica Bank, Weston, FL (561-961-6252).