Posted on: Sunday, December 21, 2003
Save with year-end tax planning
By Russ Wiles
Arizona Republic
Year-end tax planning, never a simple exercise, has become more complicated this year because of the federal tax package passed in May.
The legislation changed a few rules and quite a few numbers. As a result, many taxpayers will want to pay more attention than usual to year-end moves.
Anyone seeking to shave their 2003 tax bill has one month remaining to strategize and take the needed steps. The list of possible action items includes:
• Capital gains and losses
• Options for increasing deductions
• Mutual fund purchases
In all these areas, a little planning now can mean big savings come April 15.
Capital gains
Capital gains and losses provide one of the most important areas for year-end tax planning, and reflect one of the biggest changes in the tax law.
As in past years, investors who own stocks, mutual funds or other investments are motivated by a key goal. If possible, they want to realize $3,000 more in capital losses than in capital gains, since that's the maximum amount of net losses that can be deducted annually against ordinary income.
This year, the strategy is even more important because of the new, maximum 15 percent rate on long-term gains and losses, down from 20 percent in 2002.
"With lower rates, what you sell and when you sell becomes very important," said Jim Darling, a certified public accountant at Jenner & Darling in Tempe, Ariz.
RIA, a New York-based publisher of tax reports, provides the following example:
Suppose you're in the new 25 percent income bracket and have $3,000 in net capital losses, but you're thinking of locking in a $3,000 long-term gain on a stock. Should you do it?
If you sold the stock in 2003, you would have $3,000 in gains and $3,000 in losses for the year, with no net tax effect.
But if you waited to sell until 2004, you would have a net loss of $3,000 that you can deduct against ordinary income this year, for a tax savings of $750 (25 percent of $3,000). When you sell the stock next year at the 15 percent long-term rate, you would pay $450 in tax (15 percent of $3,000), and thus save $300 by waiting.
In other words, by holding off on cashing gains until next year, you could preserve a low, long-term rate on the gain.
"Now you have to stop and ask yourself, should I give up a 15 percent (or lower) capital gain rate?" Darling said. A similar dilemma applied in past years, but it's more important now because of the wider gap between ordinary income and capital gains/losses.
Itemized deductions
Another potential snag involves itemized deductions.
Normally, taxpayers who itemize have been advised to lock in as many deductions as possible before year-end. But because of a notable jump in the standard deduction, especially for married couples, a lot of people who previously itemized might be better off taking the standard deduction, said Mark Luscombe, a senior federal tax researcher at CCH Inc. in Chicago.
If you do plan to itemize, be aware of deductions you can take for making cash donations to charities or non-cash donations of tangible items.
"You can give old clothes and other personal belongings and write off the fair market value," said Steven Kopp, managing director of American Express Tax & Business Services in Phoenix.
Mutual funds
Another tax tip, not dependent on the 2003 tax bill, involves mutual-fund purchases. This is the time of year when many funds determine which taxpayers should receive capital gains distributions. These payments reflect gains realized by the fund's manager during the year. They're best avoided, assuming you hold shares within a taxable account.
You generally want to hold off on large new purchases until after a fund's record or "ex-distribution" date unless you're investing in an individual retirement account or other tax-sheltered plan.
