Every Reader's Tax Situation Is Unique - Do Your Homework Before Father Time Ushers In 2010
1. Use Tax Losses Efficiently. Planning for the effective use of tax losses is necessary, no matter how psychologically unpleasant. Long-term or short-term capital loss carryovers from 2008 or an earlier year, or net operating losses (which are ordinary losses) from a business, are the most common tax losses. Tax losses must be realized, meaning that market losses in a securities account are not tax losses until those securities are disposed of, or become worthless, there is a tax election treating unrealized positions as realized. To analyze your 2009 taxes, you need to have the amounts of the categories of loss carry forwards from prior years, as well as an estimate of what any losses will be for 2009. Capital losses of individuals are, generally, deductible only for the first $3,000 to the extent that capital losses are greater than capital gains in a year. If you are an investment manager and have taxable investors, bear in mind that if you have had a down year, you need to realize the tax losses your investors suffered economically, so that they can at least reduce their taxes. We have seen some managers who have had a down year sell the winners and keep the losers, generating a tax liability for their investors. This is not the time to be sentimental about the losers. Holding onto losers, or reacquiring the "same or substantially identical securities" within the 61 calendar day "wash sale period" (30 days prior to the sale at a loss, the date of the sale at a loss, and the next 30 days) is unwise. 2. Selling Appreciated Securities. You may own different lots of the same securities, each with its own holding period and tax cost, and may decide to sell only some of these lots. You can usually direct the broker on which lots you want sold, even if all the lots are held in street name at the broker. By doing so, you can ask for the highest cost securities to be sold, generating the least taxable profit, or, if you have tax losses you want to use up, sell the lowest cost lots.
3. Gifts to Charities of Appreciated Securities. Taxpayers who itemize their deductions can generally benefit by a contribution of appreciated securities to a charity recognized as such by the Internal Revenue Service. The giver receives a tax deduction for the full fair market value of the securities, provided the giver has a long-term holding period (over one year) in each lot of the securities donated. Giving securities whose value has depreciated is a bad idea, because you cannot deduct the loss, so it is better to sell the losing position and give the cash proceeds to charity.
4. Contributions to Retirement Plans. To the extent that you can contribute to a retirement plan in 2009, or a later year, you should seriously consider doing so. Every dollar of contribution saves tax dollars today and defers the day of (tax) reckoning until a date in the future.
5. Look at Roth Individual Retirement Plan (IRA) to See if Advantageous. Here, we consider whether it may be preferable to wait until 2010 to take action. Contributions to a Roth IRA are not tax-deductible, but distributions are generally not taxed either. Taxpayers who have a regular taxable IRA and who want to convert it to a Roth IRA can do so, but only if their income is below certain income levels. However, these income limits are waived for conversions in 2010. This means that any taxpayer, who wants to, can convert to a Roth IRA in 2010, will owe income tax on the amount of the gain triggered by the conversion. For taxpayers who have not used all of their 2009 losses and carry forwards, this can be an attractive option.
6. Planning If You Are Not in the Alternative Minimum Tax ("AMT") for 2009. The AMT (maximum 2009 rate of 28%) has various additions to the regular income tax rate. You pay the higher if the regular rate is less than the AMT. The tried-and-true strategies: accelerate deductions in 2009, defer recognition of income, prepay state income taxes, prepay real property taxes, and make charitable contributions before year-end.
7. Planning If You Are in the AMT for 2009. The maximum AMT rate is 28%, which is less than the maximum rate on ordinary income of 35%. However, most tax deductions are not given effect in the AMT. As a result, strategies such as accelerating deductions are not useful, as deductions are not taken into effect.