Tidy Up Now for a Less Taxing New Year
No savings plan for retirement? Give yourself an early holiday gift and start one!
November 6, 2007
By Jennifer Campion
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The end of the year is always a good time for financial housekeeping. By acting now, you may be able to reduce your taxable income and save on your tax returns. Don’t wait until the holidays hit or you’ll be ringing in 2008 before you’ve had a chance to review your financial options.
Here are a few ways to take action right now:
Look at where you might have stashed some pre-tax dollars, such as in a flex-spending account at work. Do you know how much you have spent? Will you lose the money you have saved if it is not spent? Check with your employer about the plan’s guidelines. For example, must receipts be dated prior to Jan. 1, 2008, for you to be reimbursed?
With the recent market volatility, do you have any losses in your investment accounts to write off on your taxes? If you have a taxable account that has had a loss, consider swapping your money into a similar investment: Replace one growth fund with another growth fund in a different fund family. Changing fund families and maintaining similar holdings will allow you to remain visible in your sector while realizing the loss. But be sure to review your share class to see if you will incur any charges on the exchange.
Next, look for any individual stocks with a loss. Do you still like the stock despite its performance? Consider the “wash rule”: If you decide to eliminate the stock from your portfolio, you can absorb the loss and then, after 31 days, buy it back and establish a new cost basis. Are you not so attached to the stock but want to stay in the same sector? Look for another stock within that sector; for example, switch one wireless stock for another. This is a way to stay in the sector without waiting 31 days to regain your exposure.
If you participate in your company’s retirement plan, such as a 401(k), find out whether you have maxed out for the year. Have you contributed to your IRA this year? With all the expenses before and after the holidays, it may be easier to contribute now versus later. Consider any year-end bonuses that you might be able to direct into retirement savings. This also will reduce your taxable income. You may want to review all this with your accountant before the end of the year.
If you run a business and are the sole employee or are in a partnership (ownership), think about a Solo 401(k). You can set this up now and make employee contributions for 2007 until the end of the year. In addition, employer contributions may be made until tax-filing deadlines the following year, plus extensions.
If you haven’t established a savings plan for your retirement, give yourself an early holiday gift. Get started! Ask your employer whether you’re eligible for a plan and, if yes, when you may enroll. Otherwise, you can start a savings plan on your own, such as an IRA.
Have you reached the age of 70 ½? Do not forget to take your required minimum distribution (RMD) from your tax-deferred retirement account. These distributions must be taken before year-end. Why not take some money before the holidays? Waiting until the following year could result in a hefty penalty — up to 50 percent of the amount not withdrawn.
Are you thinking about giving money to charity or to a child? Options other than cash include a mutual fund or an appreciated stock position. This is a way to avoid paying capital gains while reducing your taxable estate. Consult with your tax adviser and estate-planning attorney when making these decisions.
Do you own stock options? Upon exercising your options, you will realize a gain, which is the spread between the price at the time the options were given to you and the price you received upon redemption. This will be included in your income summary and taxed accordingly. How will this affect the rate at which you are paying your taxes? Consult with your financial adviser and tax accountant to create a strategy for redeeming your options when they are in the money and before expiration.
These pointers are designed to get you thinking about ways to reduce your taxes. You may want to start working on your New Year’s resolution in November this year so that you’re well ahead of the game come 2008.
The material contained in this article has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Citigroup, Inc., its affiliates and employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matters(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should consult with an independent tax adviser based on the taxpayer’s particular circumstances.
Jennifer Campion is a financial planning specialist with Smith Barney in Baltimore. This article was written by Jennifer Campion and does not reflect the views of Smith Barney or its affiliates. Visit Jennifer’s website at www.fc.smithbarney.com/jennifercampion.
