Practicing tax avoidance -- not evasion -- is good financial planning. But the time to do it is before Dec. 31, not after. Even though we’re all busy right now, remember you have about 10 days left to make many tax-saving moves.
Here are a few tips/strategies to consider:
Review your investments. Look at your non-retirement investments to identify if you can “harvest” capital losses -- sell investments valued at less than your cost -- to offset any capital gains incurred this year. Many portfolio managers do a lot of selling this time of year, and any gains will be taxable to you unless you have capital losses to offset them. If you have capital losses carried over from prior years, selling gain assets now enables you to take profits at a potentially lesser tax cost.
Real estate investments have their own set of tax rules. If you are renting property at a loss, there are loss deduction limitations, especially if you are not actively managing the property.
Defer income. If you participate in more than one business, you can set up a retirement plan and defer income into each one. You can still set up a single 401(k) before year-end, and you have until your 2010 filing date to set up a SEP IRA.
If you’re self-employed, you can defer income by delaying some of your billings into next year. Gains and taxes on real estate sales can be spread out over time via installment sale agreements. And corporate executives should consider deferred compensation plans and/or stock options in lieu of a taxable bonus before year-end.
Maximize your deductions. We all know deductions for medical expenses, mortgage interest, real estate taxes and charitable gifts must be paid for by Dec. 31 to be deductible even if by credit card. Donating appreciated property held more than a year rather than selling it and gifting the proceeds will usually produce greater tax savings. However, for property that has gone down in value, sell it first and then make a donation. Note: The limit on itemized deductions expired for 2010 only, which means your charitable giving should not be limited regardless of how high your income might be.
“Bunching,” which is aggregating deductions more heavily into one year, while taking the standard deduction the following year, can also save taxes. Home equity loans are better for carrying personal debt than credit cards because they often have lower interest rates and that interest is tax deductible.
Thinking of home improvements? For 2010, tax credits are available for qualified energy improvements to your home, such as certain windows, doors, metal roofs, water heaters, etc. Lesser-known deductions include health savings account contributions by the self-employed and (limited) premiums for long-term care insurance.
It’s always best to consult a qualified tax professional before implementing certain tax-saving strategies. But don’t wait! After Dec. 31, some of these opportunities will be gone.
Karin Grablin, a certified financial planner with SRQ Wealth Management, can be reached at firstname.lastname@example.org or (941) 556-9004.