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Last-Minute Tax Tips

The calendar will soon be flipping over to Jan. 1, so now is the time to make those last-minute tax moves that will take a bicuspid out of your annual tax bite. Here are a few suggestions.

Contribute to your favorite charity
If you have appreciated stock that you've held for more than one year, you might want to keep the cash in your pocket and donate the stock. You'll avoid paying tax on the appreciation, but will still be able to deduct the full value of the stock. You win, your charity wins, and the only loser is Uncle Sammy (but he doesn't really mind, which is why this tax break has been written into the law).

If you still love the stock and want to maintain a position in the shares after your charitable contribution, you can simply buy new shares in the company. Your charity will be able to assist you with this transaction, and it can really be a great deal for all involved. If you're looking for a worthy and fiscally responsible charity, check out our nominees for the annual Foolanthropy drive.

And don't forget about the contributions that you will make by check! Remember that you need to have the check written and given to the charity (or at least mailed out) before the end of the year in order for this deduction to "stick." It doesn't matter that the charity may not actually cash the check until next year. The key is that you deliver it to the charity before the end of the year.

Remember that this little trick has merit only if you are planning on itemizing your deductions on Schedule A. If you're a "standard deduction" filer, you should still keep charity in your heart, but Uncle Sammy won't help you out with a tax deduction.

Clean up your portfolio
You might own stocks that are no longer appropriate for your portfolio. And those stocks might also be in a loss position. Remember that you can sell these shares, take the loss, and use that loss to offset the sale of gainers (and even long-term capital gains from mutual funds) in the current tax year. And, once you've used your losses to offset your gains, you can use up to $3,000 in losses to offset your other income. That'll save you tax dollars right now.

For any stock or mutual fund sale, the trade date is the controlling date. The settlement date is not recognized for tax purposes. There are very few trading dates left in the year, so if you want to clean out your portfolio and realize some losses, you must get it done before the last trading date of the year.

Use your credit card
If you have year-end deductible expenses (such as business expenses, medical expenses, charity, rental expense, miscellaneous itemized deductions, or virtually any allowable deduction), you can use your credit card to make the purchase this year, take the deduction this year, and pay your credit card bill next year. When you pay with a credit card, the IRS considers the expense deductible in the year that the charge is incurred, not necessarily when you pay the credit card charge.

In fact, going back to the first tip, you can even find charitable organizations that accept credit cards for charitable contributions. If you have the right credit card, you can receive a 30-day "float" that amounts to an interest-free use of the bank's money if you pay it off when the bill comes.

Prepay your state and/or local taxes
If you believe that your tax bracket next year will be no higher than it is this year, and you won't be bothered by any alternative minimum tax issues, consider making those state and local tax payments before the end of this year. After all, you're going to owe the money anyway, right? So, why not make those payments before Dec. 31 and take the federal tax deduction this year?

This doesn't apply solely to people who have fourth-quarter estimated tax payments to make in January. If you are a W-2 wage earner and expect a state/local tax balance due, you can use a state/local prepayment voucher and make your tax payment before the end of the year. But before you leap, make sure to take a look at your alternative minimum tax position. If you find yourself in the AMT zone, prepaying your state taxes will not result in any additional deduction.

Again, you will benefit from this move only if you itemize your deductions. If you're a standard deduction filer, prepayment of your state taxes won't get you a tax deduction.

Catch up your 401(k) contributions
Generally, your 401(k) contributions must be made throughout the year, but some 401(k) plans allow for "catch-up" contributions in December if your contribution level is less than the maximum allowed. Using your December bonus to fund the balance of your 401(k), if allowed, might be a good way to reduce current taxes and save for your future. If your employer matches some of your catch-up contributions, you're in even better shape. Not all 401(k) plans allow for this provision, so check with your company's benefits administrator.

Dispose of worthless stock
How about those stubs you own that have completely fallen off the radar screen? Perhaps the company is in bankruptcy, or has been de-listed, or worse! You might have some worthless stock on your hands that could result in a capital loss. But the term "worthless" is a technical one from a tax standpoint. It means more than just the bottom dropping out of the price of the stock or a suspension of trading of that stock. There are some tricks that you might be able to use to get these shares sold before the end of the year, so you don't have to fight over the term "worthless" with Uncle Sammy. But make sure that you understand the rules. (You can learn more by reading this article.)

Deductions and credits for non-itemizers
Just because you don't itemize your deductions doesn't mean that there aren't deductions and credits out there for you to use. Alimony paid, pension plan deductions (Keogh, SEP, SIMPLE, IRA, etc.), student-loan interest, job-related moving expenses, medical insurance for the self-employed, penalty for early savings withdrawal, expenses for educators, the college tuition deduction, and deductions for self-employment taxes are all available to you -- regardless of whether you itemize deductions. This is also true of the Child Tax Credit, the Hope and Lifetime Learning Credit, the new retirement contribution credit, and the Dependent Care Credit.

We know that you're busy this time of year, but don't let these last-minute tax savings opportunities pass you by!

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.


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