Smart Financial Moves to Help Lower Your Tax Bill

As 2011 draws to a close, there is still time to make some smart financial moves to help lower your tax bill.  These ideas are presented generally and you should consult the appropriate professionals to see which may make sense for you.

At Home

There are home energy tax credits available for you if you make energy efficient improvements on your house.  This credit is equal to 10% of the cost with a maximum of $500 (new doors, heating and cooling equipment, etc.).  This credit expires at the end of this year, but there is also a tax credit available for the the installation renewable energy equipment (solar panels, geothermal heating etc.)  that doesn’t expire until 2016.  Details are available at www.energystar.gov.

Gifts to charity are an opportunity to do well by doing good.  You can clean out the closets, the pantry or even the garage.  You can make these gifts in kind or in cash .  A personal favorite is your local food pantry.  Helping these people help others at the holidays is particularly good cheer.

If you are over 70 ½ and are taking distributions from an IRA account, you can make that distribution (up to $100,000) direct to a qualified charity.  While you don’t get a tax deduction for the contribution, the distribution won’t be included in your taxable income.

You may want to spread some cheer among your family members.  You are able to gift $13,000 per person each year.  For example, you and your spouse could each give $13,000 to a daughter and son-in-law to help fund the down payment for a house.  That would be a gift of $52,000 this year!

At Work

Check to see what the balance is in your Flex account.  These balances need to be used by the end of the year or you lose them.  Is it time for  a new pair of glasses?

The biggest opportunity is to max out the allowable contribution to your defined contribution account.  For example, you can make a maximum contribution of $17,000 to you 401k (or 403b).  Don’t forget that if you are over 50, there is a catch up provision that allows you to contribute an additional $5,500 for a total of $22,500.  Of course there are rules related to any of the allowable contributions.  Check with your Human Resources department or at www.irs.gov.

In your Portfolio

For your taxable portfolio, this is the time to take a hard look and make sure you take full advantage of the tax rules related to the gains and losses that you have.  Remember that all of these rules presented are general in nature and your specific personal tax situation is most important.  This could be a great opportunity to reposition your portfolio while gaining some tax benefits.

Before selling a security for a gain, check to make sure if the gain is long term (held for over 1 year).  If it is close, it will usually pay to wait to cross that long term holding mark as your maximum capital gains tax will be 15%.

In addition, if you are looking to sell a security to capture the loss and then wish to buy that security back with a new cost basis, be sure to wait 30 days between transaction in order to not run afoul of what is known as the “wash sale” rule.

The IRS rules allow you to take a maximum $3,000 loss on your tax return each year.  There are many ways to get to that figure.  You may have an individual security that has that amount of loss, you may have a number of securities that have losses adding up to that amount, or you may match any number of gains and losses from securities that equals that $3,000 maximum number.  If you take losses greater than the maximum figure, that loss amount can be carried forward to future tax years.

A couple of other points.  Don’t forget to make any Required Minimum Distributions from your IRA  if you are over the age of 70 ½.  The penalty for failing to do so is 50% of the amount you fail to distribute.  That is a very stiff price to pay.

There are new rules in place concerning how the cost basis of any mutual fund share purchased after 1/1/2011 is reported to the IRS.  You may be receiving forms from your fund or investment custodian asking you to elect the cost method you want to use.  Before making a choice (or leaving the choice to default), contact your advisor to be sure you understand the choices and its implication. Because of these cost basis requirements, your 1099s for the tax year 2011 will look a lot different than those you have gotten in the past.  We’ll have more information available about this soon!

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Securities offered through a non-affiliated company, Cambridge Investment Research, Inc., a registered Broker/Dealer, Member FINRA/SIPC.  Investment Advisory Services offered through Cambridge Investment Advisors, Inc. a registered Investment Advisor