But we'll put up with the clutter until after Dec. 31. Likewise, we won't do anything until January with the property tax bill that came in the mail recently.
Jan. 13: Dreams can come true, with knowledge
Jan. 6: Impulse buys compound low savings
IN THIS PACKAGE
- Military discipline helps couple build strong financial plan
- Credit scores extend well beyond loans
- One-stop shopping overseas is problematic
- Health accounts pale for retirement savings
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Taking stock
- Express-delivery services gear up for holiday rush
- The week ahead
- Property Tax
- State Budgets
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Finally, as part of our annual investment portfolio review, we'll take steps to "rebalance" by selling some shares of a stock mutual fund that has posted solid gains this year. (As a result of these gains, stocks now make up a bigger percentage of our portfolio than we want based on our goals and risk tolerance.)
Although the fund as a whole is up nicely, because we bought shares at different times, we can identify specific ones to sell with minimum capital gains or, in some cases, even at a small capital loss.
All this maneuvering is part of a year-end tax planning ritual that regularly keeps hundreds, if not thousands, of dollars in our pockets.
Although the process may seem daunting and complex, the basic ideas are quite simple. And while everybody's situation is different and exceptions in tax matters are plentiful, the following principles will likely serve most taxpayers well:
-- Claim itemized deductions on the year they do you the most good.
Our strategy, a common one, is to take the standard deduction one year (we are doing it for 2006) and itemize the following year by "bunching" deductions into that second year (for us, 2007). Without this deliberate bunching, the itemized deductions wouldn't do us any good because they would be less than the standard deduction each year.
That's why we are waiting until January 2007 to make charitable contributions (we'll make more in December 2007).
And that's why we won't pay our 2006 property tax bill until January 2007 (and then we'll pay our 2007 bill in November 2007).
True, in Florida where we live, we could have received a $104 discount on our 2006 property tax bill if we had paid it this month. But the income-tax savings by waiting will be at least five times as much.
-- Postpone taxable income.
It generally makes sense to reduce taxable income in the current year (and therefore, postpone paying taxes on it).
Although eventually you'll have to pay, you will have had the use of your money longer, presumably to invest it well and make more money.
As freelance writers, we have the latitude to control our taxable income year to year by incurring legitimate business expenses to deduct from that income, such as the money we pay for office supplies.
If you work for somebody else, you don't have this option. But you can ask that a year-end bonus be delayed until 2007, for example, or put more money into a 401(k) or other tax-deductible employer-sponsored retirement plan. -- Be tax-smart when selling investments.
Although tax considerations should not drive investment decisions, it makes sense to get the most tax advantage out of decisions you've already made, such as to sell a stock or fund.
You secure the biggest tax benefit by incurring the maximum allowable $3,000 in net capital losses each year to deduct against ordinary income, which is taxed at your marginal tax bracket. Losses that simply offset long-term gains are not as valuable because long-term gains (those on assets held more than a year) are taxed at lower rates of either 5 percent or 15 percent.
"To the extent you have long-term gains for 2006, triggering capital losses before year-end may produce a tax benefit of only 5 percent or 15 percent," said Mike Swenson, a certified public accountant and executive editor of PPC's Quickfinder Tax, part of the Thomson Corp.
"Depending on your situation, you could actually collect greater tax savings by triggering capital losses during a year in which you have minimum or no long-term gains," perhaps 2007.
On the other hand, triggering capital losses in 2006 to offset short-term capital gains on assets held a year or less, which are taxed as ordinary income, is almost always a good idea, Swenson said.
Humberto Cruz is a columnist for Tribune Media Services. E-mail him at email@example.com.