Plan Now for Deductions, Deferrals, & Capital Gains to Reduce Your 2009 Taxes
Plan Now for Deductions, Deferrals, & Capital Gains to Reduce Your 2009 Taxes
A COUPLE OF DEFERRAL TIPS
• Max out your 401(k). Defer as much of the $15,500 maximum as possible, especially if your employer offers a matching contribution. This maximum is indexed for inflation starting in 2008. Assuming a tax bracket of 35 percent, a $15,500 contribution could defer $5,425 in federal income taxes, plus state and local tax savings. If you are age 50 or older, you could defer an additional $5,000 in 2008 and further indexed in 2009.
• Consider your rollover option. If you change jobs in 2008, “don’t cash in your retirement plan. There are high taxes associated with that — including a 10 percent penalty tax if you are under 591⁄2,” says Scoll. Instead, consider rolling your 401(k) or 403(b) plan into an Individual Retirement Account (IRA). You will ultimately pay taxes on your retirement savings — but in general, the longer you keep them tax-deferred, the better.
FINALLY, CAPITAL GAINS
• Watch your mutual fund purchases. Don’t invest in a mutual fund shortly before a capital-gains distribution. Why? If you buy a mutual fund on Dec. 1, and on Dec. 10 it pays a 10 percent dividend, you will owe capital gains on the dividend. “A lot of people get snake-bitten by this one and they don’t realize it until after it’s done,” says Scoll. Fund companies are required to post anticipated distribution dates, and you can find them on their websites.
• Use losses to offset gains. When you generate short-term gains of investments held one year or less, you pay ordinary income tax — though you can use long-term or short-term losses to offset taxes on capital gains. (The most tax-efficient use of capital losses is to offset short-term capital gains.) You can also use up to $3,000 in excess capital losses to reduce the amount of ordinary income that is subject to tax. That loss can also be used to offset capital gains paid out by mutual funds in their annual distributions.
• Give it away. If you’re planning on making a large charitable contribution, do so in a high-income year. The higher your income, the greater the allowed deduction (subject to phase-out limitations). Also, think about gifting appreciated assets instead of cash to a charity. Neither you nor the charity pays tax on the gift. Meanwhile, you get the deduction and avoid the capital-gains tax.
“When it comes to taxes,” says Scoll, “there is still time for the planning it takes to enhance your position. Don’t wait until April — you’ll only end up paying more than you have to.”
Together, we can discuss:
• Strategies you can use to convert ordinary income tax into capital-gains tax.
• Gifting strategies that can reduce your capital-gains tax.
• Whether you should tap investment assets to purchase business equipment and accelerate an expense deduction
Your financial advisor can help you understand the potential impact of these and other economic indicators on your investment portfolio.
This article was written by Wachovia Securities and provided courtesy of The Strong Gaddy Lilly Wealth Management Group in Gainesville, GA. You can contact Mr. Michael Gaddy at 770-532-6361.
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