April 15, 2010: How Did You Do?

It’s that dreaded time of the year again, April 15, the day of reckoning with the IRS. It is also a propitious time to assess how effective you were in planning your tax strategy for the previous year.

Take a few minutes to answer the following questions. This will help you evaluate your tax-planning performance, and we hope it might help you improve your outcome for this year.

Capital-Gain Strategies

Any gain or loss is just a paper transaction until you actually sell an investment. When you do, the gain or loss shows up in your tax picture. Because you control the timing of buy-and-sell decisions, you have significant control over the impact these transactions have on your taxes.

Issue 1

Did you sell losing stocks before year-end to generate a realized capital loss?
Your capital gain and loss are “netted against each other” to determine the amount and nature of what you report on your tax return. If you have realized gain during the course of the year, it is generally a good idea to sell some of your losers to offset that gain. Remember, though, you have to wait more than 30 days to buy a stock back or you cannot recognize the loss for tax purposes. Even if you do not have gain to offset, you can use loss to offset up to $3,000 of ordinary income.

Issue 2

Did you wait until after the end of the year to sell a stock at a gain?
Sometimes delaying a sale just a few days can push the tax consequences into the next tax year. Again, don’t let tax considerations alone dictate your decisions. If you believe a stock is sinking fast, it may be better to sell and deal with the tax consequences than to risk further erosion of the price of the stock.

Issue 3

Did you claim a charitable deduction on your tax return?
If you itemize deductions, your charitable-contribution deductions generate tax savings proportional to your marginal-tax bracket.

Issue 4

Did you accelerate this year’s charitable gift into last year in order to reap the benefits of itemizing?

For many taxpayers, itemizable deductions come close to equaling the standard deduction each year but never quite meet that amount; consequently, they elect to use the standard deduction.

If you find yourself close to—but short of—the standard-deduction threshold, you might consider doubling up on your charitable giving this year and skipping next year. You will realize savings to the extent your extra gift causes your itemized deductions to exceed the standard deduction.

Issue 5

Did you use long-term appreciated securities or real estate to make your charitable gift?
If you use long-term appreciated securities or real estate to fund your charitable gifts, not only can you deduct the full fair-market value from your taxes, but you also avoid recognizing or paying tax on the appreciation.

Issue 6

Did you make a contribution to a tax-advantaged retirement program last year?
Combining objectives: If you have major charitable goals in addition to a desire to enhance your retirement security, with some creative planning you can address both objectives simultaneously. You can make charitable gifts that pay you income for life—and often such plans can be arranged so that most or all of the income is paid after your retirement.

Issue 7

Did you establish a charitable life-income gift last year?

Don decides to use growth stock currently worth $100,000, inherited many years ago for $50,000, to create a CRUT that will pay him 6% of its annual value. This will produce a $46,826 charitable deduction, saving him $16,389 in his 35% tax bracket. Better still, he will not have to pay any tax on the $50,000 gain when he transfers the stock to the trust—a savings of $7,500. The first year Don will receive payment of $6,000—a $6,000 net increase in cash flow because the stock he used to create the trust paid no dividends.

We would welcome the chance to discuss how this or another type of life-income plan can address your retirement-planning and charitable goals. Please contact us if we can be of assistance.

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