A Gift of Lower Taxes
The right maneuvers in December will pay off when you file your
tax return next spring
Lots of things about the holidays are infuriatingly predictable: the mobbed stores, the frustrating search for that special gift for that special person, too many parties with too many sweets and too much booze, back-to-back-to-back telecasts of A Christmas Carol and A Christmas Story. Oh yeah, and recommendations that you carve time out of your too-busy schedule for year-end tax planning. Predictable or not, these tips will save you money.
Don’t buy a tax bill. Most mutual funds pay out capital gains and dividends late in the year, and payouts are likely to be whoppers this year. Tom Roseen, a researcher for Lipper, expects this year’s distributions to exceed the record $418 billion paid to shareholders in 2006.
That sounds sweet, but there’s a potential tax trap if you invest just before the distribution. When profits are paid out, share values drop by the same amount. Recent investors basically get a rebate of part of the purchase price. But the IRS says the payout is taxable. You’re better off buying after the fund’s ex-dividend date — you get a lower price and avoid the tax bill.
Be tough on losers. The nasty twists and turns of the stock market this year may have bloodied your portfolio. You never want to let the tax tail wag the investment dog, but consider whether now is the time to unload battered investments. Selling before year-end lets you use the loss to cut your tax bill. If selling a laggard lets you reinvest in a better opportunity, it’s a win-win situation.
Kiddie tax tango. The kiddie tax — designed to prevent families from shifting the tax bill on investment income from mom and dad’s high tax bracket to junior’s low bracket — gets tougher next year. For 2007, the tax disappears when a child turns 18; starting in 2008 it expands to cover children under 19 and full-time students under 24. A money-saving year-end opportunity is best explained with an example. Say you own $10,000 worth of stock that you bought years ago for $5,000. If you sell, you’ll owe the 15 percent capital gains rate on $5,000, costing you $750. But give that stock to an 18-to-23-year-old to sell by year-end and the gain will be taxed at just 5 percent, saving the family $500. Your broker can tell you how to make the gift.
Let Uncle Sam join in your generosity. Supercharge the tax savings of year-end donations by giving appreciated assets like stocks or mutual fund shares instead of cash. As long as you have owned them for more than a year, you can deduct the full market value, and you don’t have to pay tax on the appreciation. The charity should be happy to show you how to make this happen.
Save energy, save taxes. Installing energy-efficient storm windows and doors by December 31 can trim your tax bill and your heating bill. You can claim a tax credit for 10 percent of the cost of qualified improvements, up to a maximum credit of $500. You can also earn a tax break for installing a new energy-efficient furnace or water heater.
Kevin McCormally is the editorial director of Kiplinger’s Personal Finance magazine. Visit kiplinger.com.
— Kevin McCormally
