Clever Moves Now Can Ease Tax Burden

Time is running out on year-end tax planning. Acting now can reduce your tax bill for the year, which will pay dividends when you file taxes in the spring.

Harvest your losses. If you’re anticipating capital gains on your investments this year, you can offset those gains dollar for dollar by taking a loss on another investment or two before the end of the year.

“If you’ve been waiting for an investment to hopefully turn around and it hasn’t, this is an opportune time” to sell, said Janet Fox, president of ACH Investment Group in Raleigh.

Also, if you’re expecting that losing stock market investment to turn around – but not real soon – you can repurchase the stock without penalty after waiting 30 days. If you repurchase the stock sooner than that, the loss is disallowed.

Alternatively, if you’re not anticipating capital gains from investments, you can offset up to $3,000 in ordinary income with losses.

Add to your retirement account. This is a procrastinator’s special – something you can do to reduce your tax bill that doesn’t have to be done before New Year’s Day rolls around. You can make contributions to your IRA until April 17 (which is when federal and state taxes are due next year, rather than the usual April 15). Such a move simultaneously lowers your 2012 taxes, if you’re not eligible to participate in a company retirement plan, and builds up your savings.

The maximum annual contribution to a traditional IRA is $5,000, or $6,000 if you’re 50 or older. (Contributions to employee-sponsored retirement accounts, such as a 401(k) or 403(b), must be made by year-end to count for 2011 taxes.)

Be charitable: Part I. Donations made to charities before Jan. 1 are deductible. In lieu of cash, consider donating appreciated assets such as shares of cash, said Melissa Labant, technical manager at the American Institute of Certified Public Accountants, which has a major office in Durham. “You can avoid having to pay tax on the appreciation by donating the stock directly to the charity,” Labant said. “It’s a more tax-efficient gift.”

Be charitable: Part II. Those over age 70 1/2 with an IRA are required to make a minimum withdrawal each year – whether they need the money or not. If you have the luxury of being in the latter category, you can have up to $100,000 distributed directly to a charity, or charities, of your choice. You can’t deduct the donation, but the amount isn’t added to your taxable income. And, yes, you can split your IRA withdrawal – taking some for yourself and donating some to charities.

This tax break is set to expire at the end of the year. “We don’t know if it’s going to be extended or not,” Labant said.

Adjust your withholding. This is something you can do at any time, but it makes sense for those who are in tax-saving mode as the end of the year approaches to consider it now, said David W. Harris, a CPA whose business in Cary bears his name.

“I think most people probably do receive a refund when they file their returns,” Harris said. “Adjusting the withholding is really a way of giving themselves a pay raise.” Otherwise, you’re in effect giving the government an interest-free loan by overpaying your income tax during the year.

“It’s an inverse relationship,” he continued. “The more allowances you claim, the less tax is going to be withheld.” And vice-versa.

Although the federal W-4 form and its state counterpart, the NC-4 form, come with worksheets for calculating withholding, Harris recommends using online calculators such as the one offered by Kiplinger’s at withholding/ index.php?si=1.

Be aware, cautioned Harris, that upping your allowances will reduce or eliminate your refund. So if you typically count on your refund to, for example, pay bills, you’ll have to be self-disciplined with regard to your spending.

“If you don’t have that self-discipline, don’t do it,” he advised.

by David Ranii


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