Year end tax strategies

There are things you can do to reduce your tax bill in this last month of the year.

1. Sell losing stocks that you hold in taxable accounts. You can deduct the losses against any gains in investments sold. Also, another $3,000 of losses can shelter other income. Any losses not deductible this year can carry forward as deductions in future years.

2. For those in the 10 or 15 percent tax brackets, there is no tax on capital gains or qualified dividends. This can help you directly to prune and weed your investment portfolio, or if you transfer securities to a family member in a low tax bracket they can sell and not pay any taxes. To refresh you on the tax brackets: the 10 percent – 15 percent tax bracket affects those with adjusted gross income under $35,350 for singles, or up to $70,700 for couples. And for many seniors, much of their social security income is not taxed if they are in these brackets.

3. Convert a traditional IRA to a Roth IRA. This only makes sense for seniors if their tax bracket will stay the same or increase when they retire. I continue to do some part time consulting that provides about $6,000 in income. Coincidently, the Roth IRA rules allow a maximum of $6,000 in contributions per year, so I have continued to add to my Roth IRA which will never be taxed when I withdraw. The conversion of IRA to Roth IRA is a winning strategy if you lost money in 2008-09 in your investments. In that case, conversion might incur little tax and the perpetual avoidance of taxes allows build up of this asset and never requires minimum distributions after 70 ½ years as do regular IRAs.

4. Give to charity (consider the Fallbrook Senior Center). You can donate appreciated shares of stock and pay no tax and yet get the itemized deduction for the full market value of the distribution. Don’t donate losing stocks. Instead, sell them and take advantage of the capital loss deduction and get the charitable deduction for the full value. You can also make donations to charity from your IRA up to $100,000 if you are 70 years or older by year end. This avoids the required minimum distribution rules on any gifts to charity. Note: for gifts to charity to lower your taxes, you must be able to itemize which means deductions must be more than the standard deduction which is $11,600 for married couples and $5,800 for seniors. So this brings us to another tax saving idea.

5. Gaming your deductible expenditures. If you no longer pay a mortgage, then getting enough deductions can be hard. But sometimes the every other year strategy works. In the year you hope to itemize, you bunch up itemized expenditures and prepay some January bills. If you still pay interest on a mortgage, pay the January payment in December. Maybe you are facing a big medical or dental bill. To deduct in a year these expenses must meet the hurdle of being more than 7.5 percent of your adjusted income. Prepay in December and claim deductions that make itemizing favorable. Also on Schedule A, itemized deductions are property taxes (which can be prepaid for the April payment) and the choice to deduct state taxes or sales taxes. If you are planning on buying a big ticket item like a car, then the sales tax deduction might save you money. Still helping children or grandchildren with college tuition? Then you can prepay tuition into 2012 as well as all of 2011 and qualify for one of two different tax credits.

6. Avoid all possible tax penalties Make sure by the January estimated tax date to pay 90 percent of expected 2011 taxes. If you are not sure what taxes you will owe, then pay 100 percent of last year’s taxes and you will likely avoid any penalties.

7. Avoid establishing new mutual fund positions in December. Many funds distribute large dividends and capital gains for the entire year, in December and you could have an immediate tax bill even though the fund drops in price after the distributions. Wait until January to avoid this problem.

8. Maximize your 401K contributions. Remember this is “before” tax money that reduces your taxable income. Workers can contribute up to $16,500 in employer based plans and $22,000 if you are over 50 yrs old.

9. Do it yourself pay raise. If you are working and deductions are taken out it is best to have the deductions for taxes roughly equal their tax liability. A big refund is giving Uncle Sam a no interest loan. So if you have been getting refunds over $1000, then fill out another W4 and have less deducted from your pay.

10. Upgrade your home as this is the last year to claim tax credits for energy-efficient improvements. It is worth 10 percent on things like new windows, insulation, heating and air conditioning, It is a 10 percent credit up to $500. Installation must be by Dec. 31. An even larger credit that I was able to claim is for renewable energy such as a solar photoelectric system or geothermal. This credit has no limit and is 30 percent of all costs. This credit will last until 2016.

Last of all, if you are a senior and your tax return is not complex, then AARP partnering with the IRS will do your tax returns for free at the Fallbrook Senior Center beginning mid-February. We are trained and tested by the IRS, but if we deem your return too complex, we will refer you to a paid preparer or tax software such as Turbotax. In my view, the tax code is far too complicated and unfair and doing this work is my form of constructive protest.

Margaret Singleton O’Leary holds an MBA in finance.