In our final installment of this series, we'll hit the highlights of various
other issues that should be important to you when doing your year-end tax
planning. Ready? Set? Here they come...
The Wash Sale Rules:
We have previously discussed selling some of your
"losers" to offset the gains on your "winners" for a tax reduction strategy.
But if you decide to go this route, remember that the wash sale rules are
out there. If you take a loss on a sale, and then re-purchase that security
within 30 days before OR after the date of the loss sale, you could have a
wash sale. Your loss could be disallowed. We discuss the wash sale rules
in much more detail in my Archives, so check it out if this is of interest to you. But just remember that it's out there...waiting for you to
trip over the provisions.
Holding Period:
Remember that when you buy and sell stocks and mutual funds,
the important date for tax purposes is the trade date...and NOT the settlement
date. The trade date fixes your holding period (for short-term and
long-term purposes), and also fixes the year in which the sale must be reported. Many
people are still under the mistaken impression that the "settlement" date
controls the trade. It's simply not true. So when planning your tax moves
for stock and mutual fund related transactions, make sure to focus on the
trade date. We discuss holding period and trade date issues in my Archive of articles. Take a peek.
Constructive Sales:
Many of the "old" ways to defer gains on stock sales no
longer work. Going "short against the box" and buying "deep-in-the-money"
options may trigger the new constructive sale rules. And if you do get hit
with those rules, your appreciated "long" position may be deemed a sale by
Uncle Sammy...and you may have unexpected taxes to pay. Owch. If you use
some of the more sophisticated hedging transactions, make sure that you are
familiar with the constructive sale rules. You can read more about them in
my Archive of articles...that I would suggest you do in
Investment Interest:
Remember that both short-term and elected long-term
gains create investment interest income. And investment interest income
(which also includes interest and dividend income) is the benchmark that you
must use in order to determine if any (or all) of the investment interest
that you paid will be deductible. Investment interest is generally the
interest that you pay on debts, the proceeds of which were used to purchase
investments. Margin interest is one component of investment interest. So
in many cases, increasing your capital gains may allow you to boost your
deductible investment interest.
But be very careful:
Should you elect to
use long-term gains as a form of investment income, you'll lose your preferred
20% top end tax rate on those gains. That may not be a bad thing, and it
very well may be something that you want to do...given your specific
circumstances. But you could also get tripped up if you're not careful. So
be (careful…that is).
Deductions and Credits for Non-Itemizers:
Just because you don't itemize your deductions
doesn't mean that there aren't deductions out there for you to use. Alimony
paid, pension plan deductions (Keogh, SEP, IRA, etc.); student loan
interest; job related moving expenses, medical insurance for the self-employed,
penalty for early savings withdrawal, and deductions for self-employment taxes are
all available to you...regardless of if you itemize your deductions or not.
And don't forget that there are a plethora of credits available to you...that
you can take...even if you don't itemize your deductions.
Convert a Disaster into Cash:
Most of you already know that the uninsured
portion of a casualty loss is deductible in the year that the loss is
incurred provided it exceeds 10% of your adjusted gross income. However,
many taxpayers don't realize that if they suffered a loss in 1999 in an area
designated by the President as a disaster area, they actually have a choice.
Subject to the 10% limitations, you can deduct the loss in either 1999 (the
year of the loss) or you can amend your 1998 tax return and claim the loss
(and any resulting tax refund) in that year. The advantage to amending your
1998 return is that you don't have to wait an entire year to get some tax
benefits. But make sure to make your decision wisely. Because of the 10%
AGI limitation, you may want to elect the year with the smaller income...which
may allow for a greater casualty deduction.
Business Deductions:
For all of you business owners out there, don't forget
the impact that a "Section 179 election" can have on your taxes. As you
know, when you purchase assets for your business, you're required to
depreciate those assets, and claim the depreciation deduction over a number
of years. But the Section 179 election" (the section of the IRS code that
allows this treatment) permits you to "expense" the entire cost of the asset
in the year purchased. For 1999, the "Section 179 election" amount equals
$19,000...which means that you can immediately expense up to $19,000 of assets
that you've purchased during the year. So if you've laid out a few bucks on
computers, office furnishings, or other business equipment, don't overlook
this important provision.
Make the little stuff count:
Again, for all of you who may be business
owners, don't let the little stuff get away from you. If tax deductions
will do the business more (or at least as much) good this year as next, consider
buying business assets and supplies now...rather than waiting until after the
first of the year. Why wait? If you're going to need the stuff in the very
near future anyway, consider making the purchase (and taking the tax
deduction) now...and not next year.
I hope that you've enjoyed our tax planning series. I'm sure that you've
found at least one tip that will reduce your 1999 taxes...which is what I
was hoping to accomplish. More for you and less for Uncle Sammy. Nothing wrong
with that, eh? And don't forget: if you would like to read more about many
of the issues discussed over the last five weeks, you can do so in the Archive area.
- November 19, 1999
