While the stockings may be hung by the chimney with care, have you also taken care of your tax-reduction planning? The calendar will soon be flipping over to January 1, so now is the time to make those last-minute tax moves that will take a bicuspid out of your annual tax bite. Here are a few suggestions
Contributions To
Your Favorite Charity
If you have appreciated stock that you've held for more than one year, you might want to keep the cash in your pocket and donate the stock. You'll avoid paying tax on the appreciation, but will still be able to deduct the full value of the stock. You win, your charity wins, and the only loser is Uncle Sammy (but he doesn't really mind... which is why this tax break has been written into the law!).
If you still love the stock and want to maintain a position in the shares after your charitable contribution, you can simply buy new shares in the company. Your charity will be able to assist you with this transaction, and it can really be a great deal for all involved. (Looking for a worthy and fiscally responsible charity? Check out the nominees selected by the Motely Fool's Foolanthropy 2001.)
And don't forget about the contributions that you will make by check! Remember that you need to have the check written and given to the charity (or at least mailed out) before the end of the year in order for this deduction to "stick." It matters not that the charity may not actually cash the check until the next year. The key is that you deliver it to the charity before the end of the year.
Remember that this little trick has merit only if you are planning on itemizing your deductions on Schedule A. If you're a "standard deduction" filer, you should still keep charity in your heart, but Uncle Sammy won't help you out with a tax deduction.
Use Your Credit Card
If you have year-end deductible expenses (such as business expenses, medical expenses, charity, rental expense, miscellaneous itemized deductions, or virtually any allowable deduction), you can use your credit card to make the purchase this year, take the deduction this year, and pay your credit card bill next year.
You see, when you pay with a credit card, the IRS considers the expense deductible in the year that the charge is incurred, not necessarily when you pay the credit card charge.
In fact, going back to the first tip, you can even find charitable organizations that accept credit cards for charitable contributions. If you have the right credit card, you can receive a 30-day "float" that amounts to an interest-free use of the bank's money if you pay it off when the bill comes.
Prepay Your State and/or Local Taxes
If you believe that your tax bracket next year will be no higher than this year, and you won't be bothered by any alternative minimum tax issues, consider making those state/local tax payments before the end of this year. After all, you're going to owe the money anyway, right? So why not make those payments before December 31 and take the federal tax deduction this year?
You might think that this strategy only applies to people who have fourth-quarter estimated tax payments to make in January, but it really doesn't. If you are a W-2 wage earner and expect a state/local tax balance due, even you can use a state/local prepayment voucher and make your tax payment before the end of the year. But before you leap, make sure to take a look at your alternative minimum tax position. If you find yourself in the AMT zone, prepaying your state taxes will not result in any additional deduction.
But again, remember that you will only benefit from this move if you itemize your deductions. If you're a standard deduction filer, prepayment of your state taxes won't get you a tax deduction.
Catch Up Your 401(k) Contributions
As you know, there are maximum limits to 401(k) contributions each year. Generally, your 401(k) contributions must be made throughout the year, but did you know that some 401(k) plans allow for "catch-up" contributions in December if your contribution level is less than the maximum allowed? Using your December bonus to fund the balance of your 401(k), when allowed, might be a good way to dodge some current taxes. If your employer matches some of your catch-up contributions, you're in even better shape. Not all 401(k) plans allow for this provision, so check with your company's benefits administrator.
Worthless Stock
How about those stubs you own that have completely fallen off the radar screen. Perhaps the company is in bankruptcy... or de-listed... or worse! You might have some worthless stock on your hands that might generate you a capital loss. But the term "worthless" is a technical one from a tax standpoint. It means more than just the bottom dropping out of the price of the stock or a suspension of trading of that stock. There are some tricks that you might be able to use to get these shares sold before the end of the year, so you don't have to fight over the term "worthless" with Uncle Sammy. But make sure that you understand the rules.
Deductions and Credits for Non-Itemizers
Just because you don't itemize your deductions doesn't mean that there aren't deductions and credits out there for you to use. Alimony paid, pension plan deductions (Keogh, SEP, SIMPLE, IRA, etc.), student-loan interest, job-related moving expenses, medical insurance for the self-employed, and deductions for self-employment taxes are all available to you -- regardless of whether you itemize deductions. This is true also for the many credits available to you even if you don't itemize your deductions. Some of the most popular credits include the Child Tax Credit, the Hope and Lifetime Learning Credit, and the Dependent Care Credit.
Related Links:
Netting Out Capital Gains and Losses on Schedule D
Worthless Stock
Tax Credits - An Overview
Charitable Contributions of Stock
If you like the way Roy Lewis simplifies confusing tax issues, check out his just-published book, The Motley Fool's Investment Tax Guide 2000: Smart Tax Strategies for Investors. This handy 360+ page guide covers just about every tax aspect of a typical Fool's life: investing, marriage, children, education, homes, home offices, retirement accounts, medical expenses, and much more.)
December 21, 2001
