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. And with the recent passage of the 2003 Tax Act, there are even more tax moves to consider. 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 don't forget about the contributions that you will make by check. 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 (or even receive) the check until next year. The key is that you deliver it to the charity before the end of the year. The same goes if you decide to donate an auto or other large item to a charitable organization.
Remember that a deduction for charitable contributions 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.
If you're interested in learning about some world-changing organizations, check out Foolanthropy 2003.
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. 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. 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.
But even if you do have long-term stock gains, don't fret too much. For long-term gains realized after May 5, 2003, the maximum tax on those gains amounts to 15%. And, depending upon your marginal tax bracket, it could be even less.
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, state taxes, 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? And why not make it by credit card? Many states allow for the payment of state taxes by credit card, so you can secure your deduction in 2003, but not actually pay the credit card until sometime in 2004. Sweet!
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.
Make business large purchases now
If you're a business owner, consider buying those big-ticket items before the end of the year. That would include virtually any business asset, such as computers, furnishings, and a business truck or auto. I certainly don't advise spending money just for the sake of spending it before the end of the year (we'll leave that to the government). But if you need business assets in order to improve your efficiency, or you're considering making those purchases early next year anyway, make 'em now and take advantage of the new depreciation rules that will likely allow you to deduct those purchases immediately, without the hassle of depreciation.
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, even if those shares are no longer traded on any market. If done correctly, you can realize the loss this year but still keep the stock in the family in the off chance that it'll come back from the dead.
Deductions and credits for non-itemizers
Just because you don't itemize your deductions doesn't mean that there aren't deductions and credits available to you. 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 retirement contribution credit, the foreign tax credit, the adoption credit, and the Dependent Care Credit. Many people simply file the "short form" since they know that they can't itemize their deductions. Don't get caught in this trap. There are quite a few deductions and credits available for you even if you don't itemize.
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.