Tax Planning Is a Year-Round Activity
There's always a familiar flurry of activity in December - getting in those last-minute charitable deductions, deciding whether to make that year-end property tax payment, asking your broker whether to lock in a capital gain or loss. But some of the most effective tax planning takes place far earlier in the year. Especially in this year of low investment yields and volatile stock values, tax savings can help improve our financial picture.
Tax-wise investing
In light of this year's stock performance, are you considering rebalancing your investment portfolio? Don't forget the tax implications. If otherwise advisable, limit sales of appreciated assets to those held inside tax-sheltered accounts, since these gains will not be taxed currently. Conversely, consider selling investments that have declined in value from your taxable accounts (so that as much of the loss as possible will be currently deductible). Keep in mind, however, the annual overall $3,000 capital loss limitation. You can also rebalance your portfolio without triggering tax consequences, by redirecting future investing activity. For example, you may wish to invest dividends and new investment funds in asset categories that are currently underweighted in your portfolio.
Want a quick way to improve your investment yield? One time-tested way is to reduce consumer debt. For example, if you're in the 27% marginal tax bracket, you'd have to earn a return of over 20% on a taxable investment for it to be as valuable as using the money to pay off a credit card debt with a 15% nondeductible interest rate.
Planning with retirement accounts
Don't forget that the power of tax deferral within retirement savings accounts can improve a less-than-ideal rate - and that doesn't include the current tax deductions that are often available as well. With that in mind, are you making appropriate use of available retirement plans: For example, even if your business is just a sideline for you, have you considered setting up a retirement plan to shelter part of your business income?
Also, you may want to consider accelerating IRA and Keogh contributions. You can wait until the due date of your 2002 return to make IRA contributions for this year, and, if you establish a Keogh plan by year end, you can delay those contributions even longer if you file an extension. But why wait? By making contributions now, you get extra months of tax-deferred compounding.
A good time to make gifts
Every year, you and/or your spouse can give up to $11,000 each to a child or anyone else without incurring any gift tax. Because this amount is based on the value of the gift when it is made, the current decline in stock values provides another tax-planning opportunity. If you wish to make gifts of stock whose value is currently down, you can give away more shares than before. Thus, whether you are planning to make gifts only to the extent of the annual exclusion, or are considering gifts in greater amounts, now is the time to think of devalued stocks as a good gifting opportunity.
Making deductions count
Another way to maximize your after - tax "yield" is by taking advantage of all appropriate tax deductions.
Do you have a child heading toward or already in college? Confused by all the tax credits and deductions now available, both for tuition and for education savings? Call our office so we can help you take advantage of all possible deductions and credits.
Are you losing the benefit of your mortgage deduction? This may be the case if you don't have enough deductions to itemize each year or if you're subject to the phaseout of itemized deductions because of the level of your income. It may make more sense to pay down your mortgage by using funds currently in low-yield taxable investments. The interest on these investments is taxable, whereas you may be getting little benefit from your mortgage deduction.
Don't forget the AMT
Any planning should include a thorough review of the potential impact of the alternative minimum tax (AMT). While the AMT was designed to limit the ability of high-income taxpayers to reduce their taxes through the use of certain large deductions, the AMT affects more and more taxpayers each year.
Start now
Don't wait to begin your 2002 tax planning. Through careful planning, your tax liability can be reduced and your overall financial position improved. Please don't hesitate to call our office with questions this article may have raised, or for additional assistance.
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- This article is excerpted from the CPA Bulletin that is prepared monthly by the staff of the AICPA for the clients of its members. This article does not have any official authority and the information therein should not be acted upon without professional advice. Copyright ã 2002, 2003, American Institute of Certified Public Accountants, Inc., Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881
- ã 2003 David J. Driscoll & Company