The Wash Sale Rules: We have previously discussed selling some of the "losers" in your portfolio to offset the gains on your "winners" as a tax reduction strategy. But, if you decide to go this route, remember that the wash sale rules are out there. If you take a loss on a sale and then repurchase that same security within 30 days before or after the date of the loss sale, you could have a wash sale and your loss could be disallowed. We discuss the wash sale rules in much more detail in the Taxes FAQ area, so check it out if this is of interest to you. Just remember that it's out there... waiting for you to trip over the provisions.
Holding Period: Remember that when you buy and sell stocks and mutual funds, the important date for tax purposes is the trade date... and not the settlement date. The trade date fixes your holding period (for short-term and long-term purposes), and also fixes the year in which the sale must be reported. Many people are still under the mistaken impression that the "settlement" date controls the trade. It's simply not true. So, when planning your tax moves for stock- and mutual-fund-related transactions, make sure to focus on the trade date. We discuss holding period and trade date issues in the Taxes FAQ area. Take a peek.
Constructive Sales: Many of the "old" ways to defer gains on stock sales no longer work. Going "short against the box" and buying "deep-in-the-money" options may trigger the new constructive sale rules. If you do get hit with those rules, your appreciated "long" position may be deemed a sale by Uncle Sammy and you may have unexpected taxes to pay. Ouch. If you use some of the more sophisticated hedging transactions, make sure you are familiar with the constructive sale rules. You can read more about them in the Taxes FAQ area on Investment Issues (The Constructive Sale Rules - Part I, Part II, Part III, and Part IV).
Investment Interest: Remember that both short-term and elected long-term gains create investment interest income -- and investment interest income (which also includes interest and dividend income) is the benchmark you must use to determine if any (or all) of the investment interest you paid will be deductible. Investment interest is generally the interest that you pay on debts, the proceeds of which were used to purchase investments. Margin interest is one component of investment interest. So, in many cases, increasing your capital gains may allow you to boost your deductible investment interest. But be very careful: should you elect to use long-term gains as a form of investment income, you'll lose your preferred 20% top-end tax rate on those gains. That may not be a bad thing, and it very well may be something that you want to do, depending on your specific circumstances, but you could also get tripped up if you're not careful (so, by all means, be careful).
Deductions and Credits for Non-Itemizers: Just because you don't itemize your deductions, doesn't mean that there aren't deductions out there for you to use. Alimony paid, pension plan deductions (Keogh, SEP, IRA, etc.), student loan interest, job-related moving expenses, medical insurance for the self-employed, penalty for early savings withdrawal, and deductions for self-employment taxes are all available to you -- regardless of whether or not you itemize deductions. And don't forget that there are also a plethora of tax credits available to you, even if you don't itemize your deductions.
Convert a Disaster into Cash: Most of you already know that the uninsured portion of a casualty loss is deductible in the year that the loss is incurred, provided it exceeds 10% of your adjusted gross income. However, many taxpayers don't realize that if they suffered a loss in 1999 in an area designated by the President as a disaster area, they actually have a choice. Subject to the 10% limitations, you can deduct the loss in either 1999 (the year of the loss) or you can amend your 1998 tax return and claim the loss (and any resulting tax refund) in that year. The advantage to amending your 1998 return is that you don't have to wait an entire year to get some tax benefits. But be sure to make your decision wisely. Because of the 10% AGI limitation, you may want to elect the year with the smaller income to maximize the allowed casualty deduction.
Business Deductions: For all of you business owners out there, don't forget the impact that a "Section 179 election" can have on your taxes. As you know, when you purchase assets for your business, you're required to depreciate those assets and claim the depreciation deduction over a number of years. But the Section 179 election (the section of the IRS code that allows this treatment) permits you to "expense" the entire cost of the asset in the year purchased. For 1999, the Section 179 election amount equals $19,000 -- which means that you can immediately expense up to $19,000 of assets that you've purchased during the year. So if you've laid out a few bucks on computers, office furnishings, or other business equipment, don't overlook this important provision.
Make the Little Stuff Count: Again, for all of you who may be business owners, don't let the little stuff get away from you. If tax deductions will do the business more (or at least as much) good this year as next, consider buying business assets and supplies now rather than waiting until after the first of the year. Why wait? If you're going to need the stuff in the very near future anyway, consider making the purchase (and taking the tax deduction) now... and not next year. This is especially true if you expect your business income to be less next year. (Conversely, if you expect your business income to increase substantially next year, you might want to wait.)
I hope that you've enjoyed our tax planning series. I'm sure that you've found at least one tip that will reduce your 1999 taxes... which is what we were hoping to accomplish. More for you and less for Uncle Sammy. Nothing wrong with that, eh? And don't forget, if you would like to read more about many of the issues discussed over the last five weeks, you can do so in the Taxes FAQ area.
Please note that Roy and Dave cannot answer individual questions via e-mail. If you have tax questions, please ask them on the taxes message board. Thanks!