Tax Moves to Make Now to Lessen the Pain Come April 2012

By Carla Fried

Between now and the end of the year you can make some tactical money moves that will save you some serious money next Spring. Consider these year-end moves that can trigger a smaller tax bill come next April 15th:

 

• Sell a losing investment. Time for some classic lemonade making. If you have an investment-stock, fund, ETF etc-that has lost value amid the markets big swings this year, you might be able to reduce your tax bill by selling it for a loss. Sell an investment at a loss and it can it can be used to offset any gains. An investment held less than on year is considered a short-term loss; holdings of more than one year are considered long-term. Short-term losses can be used to offset short-term gains, long-term losses are applied to offset long-term gains. (Remember, short-term gains are taxed as ordinary income. Long-term gains are taxed at a maximum rate of 15%.) If you don’t have any gains to offset losses, you can use $3,000 a year in losses to offset ordinary income tax. If your loss is more than $3,000, don’t worry. You can keep claiming the loss as a way to reduce your taxable income in subsequent years until you’ve accounted for the entire loss. It’s just that you have to do it in $3,000 annual increments.

• Note: If you want to sell an investment at a loss to claim the tax break and then repurchase it, be careful. You need to wait 30 calendar days to buy the exact same investment. This is what is known as the wash-sale rule. But you could buy a similar investment, just not the identical investment. So for example, if you sell Exxon Mobil you could buy Chevron immediately. It’s just that you need to wait 30 calendar days before repurchasing Exxon Mobil.

• Accelerate Mortgage and Property Tax Payments. If you’re looking for ways to generate more tax deductions, consider paying some of your 2012 housing bills before Jan. 1. For example, if you make your January 2012 mortgage payment in December 2011 you can claim the interest portion as part of your 2011 mortgage interest deduction. Same goes with any property tax you prepay. (Of course, this only works if you choose to itemize your deductions, rather than claiming the standard deduction.)

• Get Tactical with Medical Expenses. If you’ve shelled out more than usual for medical expenses this year, do a quick calculation to see if your total out of pocket costs might be near 7.5% of your adjusted gross income for the year. Any medical costs above the 7.5% threshold can be claimed as a deduction. So if you’re close you might consider pushing any elective procedures you anticipate having in 2012 into this calendar year.

• Think Charitably. Charitable donations you make by year end can be claimed as itemized deductions. That’s a win-win; helping causes you believe in and getting a tax break as well. If the value of any donation is $250 or more, make sure you file away a copy of the receipt/recognition of your donation.