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10 Year-End
Moves for Individuals 1. Harvest your investment losses in taxable accounts by Dec. 31 to offset any capital gains and/or up to $3,000 of ordinary income (up to $1,500 each for married filing separately). You can carry over any unused losses to future tax years without expiration. Watch out for the wash sale rule. This rule disallows the loss deduction if you buy back the same stock in 30 days. I would suggest looking into Holders or Spiders (index derivatives) to avoid the wash sale rules. 2. Max out on contributions to your qualified employer retirement plan and IRA. Contributions to your 401(k), 457 or 403(b) reduce your taxable income and may have the added bonus of an employer match. Contributions to your traditional IRA may be tax deductible in many cases. What's more, money in these accounts grows tax deferred, so it has a chance to compound faster. Employer plan contributions must be made before the end of the year, but you have until April 15, 2005 to make your 2004 IRA contribution. And don't forget to contribute the additional catch-up allowance if you're 50 or older. 2002 contribution limits for 401(k)s and IRAs
3. If you're self-employed, open a qualified retirement account (QRP), such as a Keogh account. QRP contributions are tax deductible and grow tax deferred. As long as you open your account by Dec. 31, you've got until the time you file your income tax return next year, including extensions, to make a 2004 contribution. 4. Open and contribute to a Roth IRA. Contributions to a Roth IRA are not tax deductible, but the money grows tax deferred. Even better, you can withdraw the money tax free if you follow the rules for the account. You can contribute to a Roth IRA if you have earned income and your modified adjusted gross income is $95,000 or less ($150,000 or less for married couples). The maximum contribution phases out, becoming zero at $110,000 ($160,000 for married couples). Also,
consider converting an existing traditional IRA to a Roth IRA if
your modified adjusted gross income (even if you're married filing
jointly) is $100,000 or less. You'll have to pay taxes when you convert
based on the value of your traditional IRA, but with the market down
as it is, those taxes will likely be lower. In fact, if you previously
converted earlier in the year when the account balance was higher,
consider reversing the transaction and re-converting at lower levels. For more
on IRAs, including the difference between a traditional IRA and a
Roth IRA, see What Is an IRA and Why Should I Invest in One? 5.
Prepay your fourth quarter state estimated tax payment - Only if
Alternative Minimum Tax is not an issue for you. 6. Prepay the second installment of your property tax by Dec. 31. Many counties bill taxpayers in two installments, one due in November and the other due in February. If you make your February payment in December, you can take it as an itemized deduction on your 2004 tax return. Again, watch out for the AMT, which disallows deductions for state and local taxes. 7. Make January's mortgage payment in December to boost your interest deduction for 2004. Also, consider converting non-deductible debt to a home equity loan or line of credit. 8. Open and fund a 529 college savings account. You'll be saving for your child's or grandchild's education and can gain immediate tax benefits as well. For example, a 529 plan allows you and your spouse to contribute up to $110,000 ($55,000 per spouse) this year without incurring gift tax so long as you elect to treat the contribution as being made over five years. Many states also offer a current income tax deduction for all or a portion of the contribution. What's
more, money in your 529 account grows tax deferred and may be withdrawn
tax free if you use it for qualified education expenses. This tax-free
status is technically set to expire after 2010, along with everything
else in the 2001 Tax Act. Even if the rules revert back to the old
law, qualified distributions would still be taxed at the child's
lower income tax rate. 9. Donate appreciated securities you've held for more than one year to a qualified public charity. You'll receive a full, fair-market-value deduction (up to 30 percent of your adjusted gross income in most cases, with five-year carry over on any unused portion) AND pay no tax on capital gains. You could also sell depreciated securities to take the tax loss first, and then give the cash to charity. 10. Consider postponing the exercise of incentive stock options (ISOs) until January 2004. That way, you'll have all of 2003 to decide on a same-year disqualifying disposition. In addition, if you hold for the qualifying period, your exercise will be cash-flow efficient because you'll be able to sell before any alternative minimum tax is due for the 2004 tax year and potentially receive an offsetting credit against any long-term capital gains recognized in 2005. Be sure it makes sense from an investment standpoint to wait, however. Also, if you're holding stock from an ISO exercise earlier this year and it has significantly declined in value since the time of exercise, then you should talk to your tax professional to see if a disqualifying disposition before the end of the year might make sense.
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