It’s Your Move: Year End Investment Decisions To Reduce Taxes and Strengthen Portfolios
Lee Rosenberg, CFP | December 19th, 2009As a financial planner, I have always urged my clients to do their taxes twice a year. And though I’ve grown accustomed to hearing the grumbling about the hassles, after they realize how great an impact it can have on reducing their tax burden, they are always glad I suggested it.
Why file twice a year? Obviously the first tax return is for the purpose of filing before the April 15 deadline. The other “filing” is actually a mock return done before the end of the calendar year so that I can assess where they stand tax wise. This gives me the needed time and flexibility to “change the score” of their tax return so that it is more in their favor before it’s game over.
Unfortunately, the mistake that most people make is turning their expensive tax advisor into nothing more than a scorekeeper. They show up after January 1, present all the facts and the paperwork, and then discover that there are very limited opportunities to reduce their tax burden because it’s already the next tax year.
So now that there are six weeks left until the end of 2009, do yourself a favor and review your portfolio’s performance and at the same time, determine if there are opportunities to reduce your tax burden. Here are some possible strategies that can make a difference:
1. You might consider either taking a profit on a particular holding for the purpose of using this as an opportunity to offset some of the losses you have incurred this year.
2. Take advantage of strategy called a “wash sale”, in which you sell, take the loss, and then buy the asset back after 31 days, effectively creating a new basis for a loss for tax purposes. This is especially opportune for those who believe that the company or fund has long term potential but feel right now that it is worth moving your position to take advantage of the tax opportunity.
3. Bunch up your medical expenses by year end so that they exceed the deductible limits. Remember, you can only deduct medical expenses if they exceed 7.5% of your adjusted gross income. So for example, if you are planning dental work, do it by December 31 so that you can use these expenses as deductions.
4. The same is true for miscellaneous expenses. These includes un-reimbursed employee business expenses, legal expense and investment expenses. You can only deduct these expenses if they exceed 2% of your adjusted gross income.
5. Towards the end of the year you may also be presented with the option of having some of your income paid either this year or next. With year-end tax planning, you can calculate whether or not it’s a prudent strategy to defer your income or not. This works best with year-end bonuses or if you own your own business, holding off on sending out invoices until after the first of the year.
6. In light of the market volatility, you may have been holding back on contributing the maximum to your retirement plan . However, it might be more advantageous to maximize your tax deductible contribution to your IRA or 401k, which would then give you the opportunity to buy into a substantially discounted market and take the maximum deduction.
7. Finally, do not forget the importance of making charitable donations. So many people and organizations are in need and by maximizing your contributions, it is a win-win situation.
Bottom line? Consider your tax obligations right now before it is too late to change the score and the outcome of the game.
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Tags: 2009 taxes, 2010 tax planning, lee rosenberg, lee rosenberg cfp, reduce tax burden, Taxes, year end tax tips
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
