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(Hint: maximizing your tax refund may be the best investment advice you get this year)

As 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 adviser 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.

In light of the volatile market conditions and unprecedented losses in investment assets, it has never been more important to follow the advice to do a mock tax return right now. For starters, if you are showing losses, you’ll need to determine whether it makes sense to sell before year’s end in order to gain the deductions. But there is a catch. It can be a dangerous assumption that all you’ll have are losses. Many of the mutual funds have also been selling off into the market decline, and this could trigger insult after injury for investors who have both losses on their portfolio and taxable
capital gains generated by their mutual funds.

Another possible pitfall is that you may also be faced with the difficult
decision of selling off your assets to prevent further decline, only to discover that these assets are still selling above their original costs and could create a taxable gain.

Furthermore, if you’ve already sold off some of your investments this year, you need to calculate whether or not your potential gain can offset some of the losses. You can deduct up to $3000 of realized loss over and above any of those that you’ve offset. In addition, some of your gain may qualify for 0 tax if you wind up in the lower tax brackets.

Before I offer some specific helpful strategies for year end tax planning, the
first thing you need to do is to check with your mutual fund companies and find out if they are planning year end distributions before December 31 because you will need a 30-day window in order to take advantage of these ideas. It may be smart for you to sell off some of the mutual funds that are planning to pay out a taxable gain prior to the distribution date so that you don’t get caught in this trap. Note: Mid-November is generally the first opportunity the mutual funds have to assess their year end strategy
insofar as distributions, so the timing is just right.

Here are some year-end tax strategies that you may have not thought of:

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 is an especially important decision this year given the likelihood that President-elect Obama will institute a higher tax rate next year for those whose incomes exceed $250,000.

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. Last but not least, please 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.

We all are aware that given the high level of economic uncertainty we our facing as a nation, 2009 is going to be very different insofar as financial strategies. But one thing is for sure. In order to finance the bailout while stimulating the economy, all the tax proposals on the table are pointing to an increase. That is why it is has never been more important to be pro-active this year. 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: cfp, financial planning, financial strategy, lee rosenberg, personal finance, Taxes, year end tax plans

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.

This entry was posted on Monday, November 17th, 2008 at 9:20 am and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.