By Robin S. Davis, CFP®
The number one investing goal for most American’s is planning for retirement. According to a 2005 survey by Affluent Marketing Service, the second most important goal of wealthy investors is minimizing taxes. With the end of the year right around the corner, there is still time to take advantage of some valuable tax-saving strategies that could put thousands of dollars in your pocket instead of Uncle Sam’s. These are simple, readily available tax-reduction techniques that you can use today.
Sell Securities to Realize Capital Losses. You may have securities in your portfolio that have decreased in value over the years and now may be a good time to make the decision to sell them in search of better returns. By selling securities at a loss, you can lower the tax liability of assets that were sold during the year at capital gain. Tax-loss harvesting can be substantial in a portfolio that consists of a large portion of individual stocks and/or mutual funds, or includes a large gain from the sale of real estate.
Maximize Retirement Contributions. If you have a retirement plan at your job or place of business, now is the time to contribute the maximum amounts allowed by the IRS to 401k plans, 403b plans, Keogh and Simplified Employee Pension (SEP) plans. Contributions sacked away in these retirement plans are pretax dollars and taxable income is automatically reduced. You may also be able to contribute to an IRA account and deduct up to $4,000 if you are under age 50 and up to $5,000 if you are over age 50. The advantage of having a SEP plan for qualified businesses, as well as IRA accounts, is the IRS allows you to make contributions that count toward the 2007 tax year as late as April 15 of 2008.
Make Charitable Donations. You can make charitable donations in several ways. One would be to donate directly to a favorite charity, institution or association that relies on gifts to provide necessary and important services to their communities. Keep in mind that you will need to get a receipt on any donation valued at $250 or more. Charitable deductions are generally limited 20, 30 or 50% of your adjusted gross income depending on certain limitations. Another way to offset potential capital gains is by donating highly appreciated stock to a charity. Since a qualified charity is exempt from income taxes, they can sell the stock without incurring a tax liability. You can also donate old clothes, furniture, automobiles and boats to a charity and deduct the wholesale fair market value of the items. Again, don’t forget to get a receipt.
Charge Tax Deductible Items for January in December. The IRS allows you to deduct items purchased on credit based on the date of purchase, not the date the credit card was paid. If you know your income will be unusually higher this year than previous years, and you know you will be making big purchases, that are normally deductible, in January, make the purchases in December instead and offset the additional income. Consider making your January mortgage payments by December 31st along with any property taxes in the first quarter of 2008. Prepaying educational tuition and fees can be claimed as itemized deductions which can also reduce you taxable income.
Defer Income and Bonus Payments. If you own a business, you may be able to defer part of your income into the next year. If you work for a business, you may be able to get your employer to defer any bonuses into the following year. Of course, if you are the employer, paying bonuses to your employees will give you an added tax deduction, as well as spreading a bit of good cheer throughout your establishment.
By working with your financial advisor and tax advisor, you may be able to implement a few of the above tax-saving strategies and reduce your tax liability for the 2007 tax season before this year comes to a close. I suggest working closely with your advisors in the 2008 tax year as there are a lot more tax-savings strategies that you may be able to utilize earlier in the year as opposed to waiting until December. A little creativity, and knowledge of IRS policies, can help you achieve goal number two, minimizing taxes. The thousands of dollars you save in taxes can be invested to help you achieve goal number 1, planning for retirement.