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The Importance Of Year-Round Tax Planning

Chances are, you prefer to think about taxes as little as possible. But just avoiding the subject won’t keep the Internal Revenue Service at bay. And paying attention long before tax season gives you time to implement strategies that could save you money. “You can’t plan backwards,” says Victoria Serles, partner and director of the Private Client Wealth Management Practice with the Seattle office of BDO Seidman, a national accounting firm. “But people who consider their taxes months ahead of time tend to be very satisfied with the results.”

You could put these strategies into effect at any time (and sooner is almost always better than later):

Profit from tax losses. Call this the silver lining of a dark cloud. With markets struggling recently, you may be sitting on investment losses. But there could also be unrealized gains in your long-term holdings, and if you had planned to sell appreciated assets—but feared the tax bite—now could be the time to act.

You can offset gains with losses dollar for dollar. So a $50,000 loss will totally negate a $50,000 gain. If you sell a stock or fund at a loss, the loss is disallowed for tax purposes if you buy the same investment again 30 days before or after the date of sale; this “wash sale rule” is meant to discourage people from selling shares for tax purposes and then immediately repurchasing them.

However, you can jump right back into a similar investment—a stock in the same industry or another fund that tracks the same index, for example. If you sell, as a loss, a mutual fund of one investment objective, you could purchase a different fund with the same objective—therefore harvesting the tax loss without changing your overall allocation.

If your losses exceed your gains, you can use up to $3,000 in losses to offset ordinary income each year, and you can save leftover losses for future years.

Maximize retirement savings. For 2009, annual contribution ceilings for retirement plans have edged up to a maximum of $16,500 in pre-tax dollars going into a 401(k), while the limit remains at $5,000 for an individual retirement account. Catch-up contributions for savers 50 or older extend those limits by $5,500 a year for 401(k)s and $1,000 for IRAs. Any deductible contributions you divert into these accounts come off the top of your income, immediately reducing your taxes. So if you’re saving less than the maximum, consider boosting your contributions now to spread the increase over the rest of the tax year. Wait until year-end and “you might not have the cash flow available to maximize that opportunity,” says Serles.

Minimize the alternative minimum tax. The alternative minimum tax, or AMT, was originally designed to ensure that the very wealthy couldn’t avoid taxes entirely by taking advantage of abundant tax loopholes. These days, though, almost anyone can get snared by the AMT. For non-business owners, several things can trigger AMT liability: claiming personal exemptions, paying state and local taxes, taking miscellaneous itemized deductions, deducting medical expenses, or exercising incentive stock options. Any combination of these could push you into AMT territory.

Sitting down early with your tax professional to run an AMT projection could help you see whether you’ll pay the AMT this year. It could also give you a chance to head off some of your liability. “If you are going to fall into the AMT area, you want to be thinking about the possibility of timing some of your deductions,” Serles says.

For example, if it looks like you’ll have to pay the AMT this year, but not next year, you might push some of your state and local tax deductions into next year, when you’ll be able to use them to full effect. Or you could think about delaying the exercise of your incentive stock options until later, or bunching charitable deductions in years that you won’t have to pay AMT and will receive the full benefit of the deduction.

Manage your business taxes. If you’re self-employed or receive income from a side business, mid-year is a good time to make sure you’re on track with your estimated taxes. Check with your tax specialist to see whether you’re sending the government the correct amount each quarter. The longer you wait, the shorter the time you’ll have to pay what you owe, and if you end up underpaying estimated taxes, you could be hit with a penalty. To reduce business taxes, you might consider employing your children. “That provides a deduction to you, and their income is taxed in a lower bracket,” say Serles. Or you could increase the tax-deductible benefits you provide to your employees or yourself. Acting well before the end of the year will let you maximize the amount you deduct.

Other tax planning strategies include Roth IRA conversions and the use of charitable trusts. However, many of these strategies are complicated, so you should seek the guidance of your financial advisor and tax professional.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.


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