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It’s the Most Wonderful Time of the Year…

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Now that Thanksgiving is behind us, you can start thinking about the upcoming season…Tax Season that is.  I know, I know this is REALLY the Holiday Season, but you can also do a few things to reduce your taxes this year if you take the time now.  Here are 3 things to consider…

  • Recognize Long-Term Capital Gains.  This one is counter-intuitive.  Most of the time, the conventional wisdom for tax advice is to delay taking gains and accelerate expenses.  That still is normally true.  But, if you are in the 10% or 15% Marginal tax bracket it may make sense to take Long-Term Capital Gains before the end of the year.  Why?  Because if you are in the 10% or 15% bracket your tax on Long-Term Capital Gains is 0%.  That’s right.  Zero, Zip, Nada.  And that tax treatment is scheduled to end on 31 December 2012.  So, you might want to take the gains this year.  But as always, there are some hoops to jump through.  First, the Capital Gain must be Long Term.  To qualify for Long-Term Capital Gain treatment you must hold the security (and in this case, I’m talking about securities) for more than one year.  A day is enough.  Just more than one-year.  Next you must be in the 10% or 15% tax bracket.  So where do these brackets end?  Well…
    1. For Married Filing Jointly the 15% bracket ends at $69,000
    2. For Single Tax Payers the 15% bracket ends at $34,500

So if your taxable income is less than these numbers with the Capital Gains you will pay zero tax on the gain.  Let me give you an example.  Assume your taxable income (gross income minus adjustments minus deductions minus exemptions) is estimated to be $50,000.  You could recognize $18,999 in long-term capital gains and not increase your taxes.  You might not want to cut it that close, but you get the point.

The other cool thing about this is as soon as you sell the security you could buy it back.  You then reset your basis in the security and when you sell it in the future you will reduce your gain or you could potentially have a deductible loss even though you are selling the security for more than you bought it for the first time.  Let me give you an example for that.  Assume you buy a stock at $100.  You decide to sell it this year at $110.  If your tax rate is 15% or less, you pay zero tax on the gain.  The next day, you buy the stock back at $110.  You keep the stock for some time and sell it for $100.  You would then get a deduction of $10 even though you are selling the stock at the same price you bought it for the first time.  The only cost to you is the transaction costs associated with the sale.

  • Gift Long-Term Capital Assets. When you gift an asset that you have held for long-term (same criteria as above) you can deduct the fair market value of the assets (with certain constraints).  So rather than give money to your favorite charity, you might want to give them appreciated securities.  Why would you want to do that?  Well, first of all it is a pretty good deal to buy a security, let’s say a stock, for $100, hold it for more than one year, and then gift to a charity when the value of stock is $110.  You get a $110 deduction put only “paid” $100.  But, probably more importantly, if you donate an appreciated security the value of the donation never shows up as a part of your income and therefore doesn’t increase your Adjusted Gross Income (AGI).  If you use the money you earn as wages to pay a charity you first add it to your AGI and then subtract it as a deduction.  With an appreciated security, you never add the value of the security to your AGI.  AGI controls a lot of things on your tax return like when you can deduct an IRA or when you qualify for the American Opportunity Credit (for college expenses).  Anytime you can reduce your AGI, you should.
  • Contribute to a Traditional IRA. Technically you have until your tax filing deadline (15 Apr normally) for this one so you can take care of your Christmas shopping first.  Contributing to a tax advantaged retirement account is one of the best things you can do for your taxes and your retirement savings.  Contributions to a Traditional IRA, if qualified, reduce your AGI and therefore reduce your total tax bill.  And, if you haven’t signed up for TSP (which you should) you don’t have much time left this year to make a difference in your taxes, so the IRA might be the better option.  As far as determining whether your contribution is deductible you need to determine if you are covered by a Pension Plan at work.  If you are on active duty, then the answer to that question is “Yes”.  If you are covered by a Pension Plan and file Married Filing Jointly then your AGI must be below $110,000 (phase out starts at $90,000) to be able to deduct your IRA contribution.  For those of you filing Single your AGI must be less than $66,000 (phase out starts at $56,000) to deduct the contribution.

Obviously, during this time of the year you have a lot of things to keep you busy.  Reducing your taxes may not be and probably should not be number one on your list.  But if you have some time, you might be able to reduce your tax bill and use the savings for something important during the holiday season or next year.


Curt Sheldon is a Fee-Only Financial Planner based in Northern Virginia.  He can be contacted at (703)542-4000, (800)928-1820 or Curt@CLSheldon.com


IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication