More Year-End Tax Savings
I know it’s tough to think about finances when you’re trying to keep up with holiday shopping and cards and the like, but you may be able to save a little money to pay off those gifts when the credit card bill comes due. Today’s Yahoo!Finance column includes some last-minute tips to save on your tax bill. Here are a few more:
-The IRS currently offers the option of deducting either your state income taxes or your state sales taxes from your federal income tax. That option expires this year. “This might be the reason to buy that car this year instead of next,” says Elda Di Re, partner with Ernst & Young. If you buy a hybrid, you may be able to get an additional deduction. See this link to find out if the hybrid you are considering qualifies for a deduction.
-If your income is low this year as compared to future years – for example, you’re a college graduate who started his first job and only worked half the year — look at expenses that you can load up on before the end of 2007. This includes medical expenses – the IRS allows for a deduction of medical expenses that go beyond 7.5 percent of your adjusted gross income. That may mean loading up on prescriptions you may need for next year, getting dental work or purchasing new eyeglasses. See this link for qualifying medical expenses.
-Low- and moderate-income taxpayers who have managed to set aside some savings can greatly reduce their federal tax bill by putting money in an individual retirement account, says Di Re. If you are single and earn $39,000 or less, or a married couple filing jointly and earn $52,000 or less, you qualify for the Saver’s Tax Credit. See the link for more information.
Related Posts
December 20th, 2007 at 2:47 pm
Hi Laura,
I have a question about the strategy that I have to take in order reduce my 2007 tax liability:
- Household gross income of $90,000
- Investment $30,000. I gained about $6,000 this year. However, in the past 02 months, due this huge downturn in the market, if I sell everything, I will be almost even.
- My question is what I have to fill for IRS. What it worths (about $29,000 – I have those stocks for less than 01 year) or I have to declare those (fictional) $6,000 as a gain?
I am a new investor and I started to trade this year. Therefore never declared investment gains/losses before.
Thanks
Americo
Dear Americo: Thanks for writing. I spoke with James Sonneborn, a certified financial planner and chartered financial analyst with Regent Atlantic Capital in New Jersey, about your question. The IRS is only concerned about what gains or losses you actually realize by selling your investments during the year. For example, if your account began the year at $30,000 and rose by $6,000, that’s an unrealized gain which the IRS is not going to tax unless you actually sold out the investments and captured that gain.
If an investor does not sell any of his investments during the year, there will be no realized gains or losses. So if your account starts at $30,000, rises to $36,000 and then drops back to $29,000 with no sales being made, you will have no tax liability. You could sell out now and realize the $1,000 loss and use that to reduce your taxable income. The IRS allows investors to use up to $3,000 of capital losses as an adjustment against ordinary income.
You only need to file a Schedule D to report realized gains or losses that occurred during the year. The schedule distinguishes between securities held for less than one year as short-term capital gains or losses, and securities held for more than one year as long term. The IRS is not concerned about the value of your portfolio, so there is no schedule to report that on.
If you decide to sell your stocks that have declined in value and realize the loss, you should not repurchase the same stocks for at least 31 days, otherwise the loss will not be allowed by the IRS. This is referred to as the “wash sale rule.”
Sonneborn suggests that if you are a new investor, rather than engage in stock trading, you should create a diversified portfolio of low cost mutual funds that are designed to help you meet your long term objectives, with a level of risk that is suitable. Good luck!
December 20th, 2007 at 6:25 pm
I have a question about donating appreciated securities – Normally, when I sell a stock, I have to be consistent about selling either first-in, last-out or last-out, first-in. When I donate appreciated securities, do I still have to follow LIFO/FIFO? Or can I donate the most appreciated shares, regardless of the order of purchase?
Thanks! You’ve offered great advice, and I really, really appreciate you mentioning the caveats for AMT. As AMT ensnares more and more Americans, a lot of people are being steered wrong by financial advice that doesn’t at least mention which tips don’t apply under AMT.
Dear Rocky Dog: Thanks for the kind feedback. According to James Sonneborn, a certified financial planner and chartered financial analyst with Regent Atlantic Capital in New Jersey, the short answer is that when an individual is gifting stock to a charity, they can and should gift the tax lots of the security with the highest appreciation, permanently avoiding capital gains tax on the stock holding.
You should also be sure to use appreciated securities that have been held for more than one year in order to maximize the deduction value, says Sonneborn. “If the security is held for less than one year, the deduction is limited to what would typically be the basis in the security, while a security that has been held for over one year provides a deduction equal to the fair market value on the date of the gift,” he says. “And for those readers making large charitable gifts, they need to be aware that the deduction is limited to 50% of their adjusted gross income in that year, with the ability to carry over the unused portion for five years.”
Hope that’s helpful. Enjoy the holidays!
November 10th, 2008 at 8:03 am
I see this blog post was made December 2007, and some of the tax comments only applied to the tax year ending in 2007.
There was a yahoo finance article today on November 10, 2008: http://finance.yahoo.com/expert/article/moneyhappy/119952?count=30&start=6#dtk-cmtscnt ,
and it referenced the post above, with the outdated tax info. A bit of time wasting for me to click on links which are not helpful.
To show respect to your readers, I suggest to post only relevant and current information.
Thank you.
Hi HT: Thanks for pointing that out. The first tip has expired, but the other two apply to 2008 taxes. For information on the Saver’s Credit, see this IRS publication.
November 10th, 2008 at 12:43 pm
What do you suggest in regards to Home Base Business and the tax breaks for it?
Hi Jacqueshall: I work from a home office, so I’m very familiar with these tax breaks. The key is that you do not have an office elsewhere. If your company allows you to work at home once or twice a week as a convenience, but your main work materials are located in an office at the company, you probably do not qualify. That said, if it is your sole office, you can write off a percentage of the rent/mortgage, utilities and other services (such as cleaning) that are required for your office. Check out this IRS publication for more.