Year-End Tax Strategies

One thing is certain: It was a very bad year for investors. And while this will probably come as cold comfort for most people, your investment losses will serve up certain tax benefits. It's worth spending some time now, before the end of the year, to be sure you are maximizing any opportunities to trim your tax bill.

The stock market is a risky place but there is a lot of opportunity out there. Risk is prevelent but my general view is that to all those of who were behind in investing and building their IRAs, this could be a 2nd chance! My firm believes that the market will rebound and when it does the individuals who did not cower but were able to roll with the fluctations, and pick strong companies, will be in very strong positions in the future. Everyone is down right now, research and then consider buying. Think about it, the federal government has given huge Dow 30 firms billions and billions of dollars. They are not going to let them fail. I don't pretend to know what is going to happen with all of the firms-but the Feds can't afford for these companies to fail. So there will be greater insight but also hopefully stronger more agressive companies will prevail.

Keep in mind that taxpayers can use their realized investment losses to offset an equal amount of gains (if you're lucky enough to have any, of course). But if you don't have any investment gains, or your losses exceed your gains, those losses can be used to offset up to $3,000 of ordinary income, or $1,500 for married individuals filing separately. Remaining losses can be carried forward to future years -- indefinitely.
That means you should assess the damage within your taxable portfolios for investments you want to sell, and get rid of them before the end of the year. Of course, you do not want to sell investments haphazardly simply to generate a loss for tax purposes. Your long-term strategy should always take precedence.
'If you do sell a security that you still like and expect to buy back later, be aware of ''wash sale'' rules, which forbid you from reaping a tax benefit if you buy the same investment within 30 days of selling it at a loss. Any losses logged won't count.

Here are several other actions to consider, given depressed asset values:
CHARITY Investors often donate appreciated stock to charity so they can circumvent capital gains taxes. This year, investors might consider selling slumping stocks first, realizing the losses, and giving the proceeds to charity, said Susan Hirshman, a wealth adviser at JPMorgan. Or, donate stock that is still trading above its purchase price.

CONVERT TO A ROTH This is an ideal time for individuals to convert their traditional individual retirement accounts to a Roth I.R.A. You must pay income taxes on the entire amount converted, so lower asset values work to your advantage. For now, individuals will face income limits for converting: single and married joint filers must have adjusted gross income of $100,000 or less. But those income limits expire in 2010.
GIFTS You can give any number of people annual gifts of up to $12,000, free of gift tax, which is an effective way to reduce the value of your taxable estate. It works particularly well now because you can give away more shares when they are worth less, and the shares can recoup their value outside of your estate. Likewise, if you want to give someone more than $12,000, you will also be able to give more shares away. And since the value has declined, you will eat into less of your $1 million lifetime gift tax exemption, which applies to gifts over the $12,000 threshold, said Maureen McGetrick, a partner with BDO Seidman.
Beyond opportunities tied to the market's swoon, some taxpayers might need to rethink their typical tax-savings strategies. Normally, it makes sense to accelerate certain deductions, like paying a portion of next year's property taxes early, and push as much income, like a bonus, into the next year as possible. But if you expect to land in a higher tax bracket in 2009, you might do the reverse: take as much income as possible now and defer certain deductions.
Some wealthier taxpayers might prefer to take this reverse approach because it's unclear if and when their taxes will rise.
''The bottom line is that we don't know where tax rates are necessarily going, but what we do know that the political and economic outlook is ripe for tax increases,'' said Ms. Hirshman of JPMorgan. ''And most importantly, we do know our tax rates are at historical lows.''
On the other hand, if you are a victim of the flagging economy and you expect your income to drop significantly next year -- or you expect to lose your job -- you might accelerate deductions and offset as much of this year's income as you can, said Mark Luscombe, a principal analyst at CCH.
Of course, all strategies need to be considered in light of the alternative minimum tax, a parallel tax system set up in 1969 to ensure that the wealthiest taxpayers paid their fair share of taxes. People who expect to be caught by the A.M.T. should calculate their taxes twice: once under the regular system and again under the A.M.T., which has its own set of complex rules and excludes certain deductions like property taxes. For joint filers, the amount of income exempt from A.M.T. increases to $69,950 this year from $66,250 in 2007, and, for singles, to $46,200 from $44,350.
Several other tax breaks were either extended or added this year by Congress, including these:

PROPERTY DEDUCTION This new, additional standard deduction for property taxes (up to $500 for single filers and $1,000 for joint return filers) can be claimed by people who take the standard deduction and pay property taxes.
It might end up being a better deal for people who normally itemize their deductions. And, ''if you are in this category, consider turning the usual year-end strategy on its head: Shift as many deductible expenses, such as charitable contributions, from 2008 to 2009,'' said Bob Scharin, senior tax analyst from the tax and accounting business of Thomson Reuters. ''That way, you can claim the bigger standard deduction in 2008 and, by shifting what would otherwise be 2008 expenditures into 2009, put yourself in a better position to exceed the standard deduction amount next year.''

SALES TAX Individuals who itemize their deductions have the choice of deducting state and local sales taxes instead of income taxes. This works well for anyone who has made an unusually large purchase or for those in states without income taxes, like Florida.
I.R.A. DONATIONS Individuals who are at least 70 1/2 can use tax-free distributions up to $100,000 from their I.R.A.'s for contributions to qualified charities in 2008 and 2009. Such distributions do not count as income and cannot be deducted as charitable donations.

HOME BUYER CREDIT First-time home buyers can take what amounts to an interest-free loan from the government in the form of a federal tax credit of $7,500 or 10 percent of the purchase price, whichever is smaller. You must pay back the loan over 15 years, and income limits apply.
EDUCATION A deduction for higher education expenses was extended through 2009 and applies to all taxpayers, including those who do not itemize their deductions. Single filers with adjusted gross incomes under $65,000 (or $130,000 for joint filers) can deduct up to $4,000 for education expenses. Taxpayers with income of $65,000 to $80,000 (or $130,000 to $160,000 for joint filers) can claim a reduced deduction of up to $2,000.

KIDDIE TAX Beginning this year, children under age 19 (up from age 18) and full-time students under age 24 with investment income in excess of $1,800 will be subject to their parents' tax rate.

Source for this article: New York Times