The year is drawing to an end and tax season is (unfortunately) quickly approaching. Although appropriate financial planning is a year-round concern, now is a good time to take steps to help reduce the impact of taxes on your finances and to get a jump start on next year’s planning. I have detailed here some useful information to get you started.
“If you were fortunate enough to realize capital gains this year, you may offset those gains by selling stock or other securities at a loss. Long-term capital gains result from the sales of capital assets-such as stocks or bonds-held for longer than one year. The maximum long-term capital gains tax rate is 20%.
“If your capital losses exceed your capital gains, you may deduct the losses dollar-for-dollar against ordinary income up to $3,000. Any excess losses (over the $3,000 limit) may be carried over to future years- and, maybe, future tax savings.
“Be careful of “wash sales.” If you plan to repurchase the same security you sell to generate a capital loss, the loss will be disallowed if a “wash sale” occurs. The “wash sale” rule states: “you may not take a loss if, within a period beginning 30 days before you sell your security and ending 30 days after that date (a period covering 61 days), you have acquired substantially identical stock or securities.” If a wash sale occurs, the loss is deferred until the newly acquired stock is eventually sold or disposed. The risk of being out of the market is that your security might appreciate in value within the 30-day period. You would then be forced to repurchase at a higher price.
An alternative strategy would be to buy and hold an equal number of shares now (effectively doubling up), then selling the original shares for a loss 31 days later. The last day to double up for 2002 is November 29.
“If you have purchased the same stock at different times and plan to sell some, you can reduce your capital gain by instructing your Financial Consultant to sell those shares with the highest cost basis first. According to IRS regulations, if you do not provide specific instructions, the shares you have held longest will be sold first.
“Gift away what you don’t need. You may gift up to $11,000 ($22,000 for married couples) per individual without triggering a gift tax liability. When you gift away a portion of your assets, those assets and all their future appreciation, dividends and interest are removed from your gross estate.
Keep in mind that any medical and tuition payments made directly to the provider are not considered gifts and are therefore excluded from the $11,000 gifting limit.
And, on the subject of retirement plans:
“Increase contributions to your employer retirement plan. Not only will you accumulate more for retirement, you will also receive immediate tax deferral on those contributions. Better still, many employers offer matching contributions. So, if your employer offers a 401(k) or an alternative tax-deferred qualified plan, take full advantage. Under current law, you can contribute up to 100% of your salary to a maximum of $11,000 ($12,000 for those age 50 and older with the catch-up provision).
“Not covered by a plan at work? Contribute the maximum to either a Roth or traditional IRA. You can fund your 2002 IRA until April 15, 2003. The maximum contribution for an individual is $3,000, $3,500 if you’re age 50 or older. If you have a non-working spouse (or if your spouse elects to be treated as a nonworking spouse), establish a spousal IRA-you may make combined contributions up to $6,000 ($7,000 if 50 or older). And, making your 2003 contributions early in January can add many months of interest to your nest egg.
“If you’re self-employed, establish a qualified retirement plan. Set up a Keogh or Simplified Employee Pension Plan (SEP). You’ll be able to shelter up to 25% of your income per year-in most cases, to a maximum of $40,000. The last day to establish a Keogh is December 31, 2002. You have until April 15, 2003 to establish a SEP-later if you have an extension.
These are just of few of the tax savings ideas you can use now. Of course, you should review these ideas with your tax and financial advisors before taking action.
Pamela Kuehling is a Financial Consultant and Retirement Plan Consultant at Smith Barney. You can reach her at pamela.i.kuehling@rssmb.com or 314-982-0380 or 800-999-9580 ext. 380. Salomon Smith Barney does not provide tax or legal advice. We recommend that you review your complete financial situation with your tax advisor before making any major changes to your portfolio.