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End the year on the right financial track by making smart money moves before Dec. 31. Here are a few tips to help you lower your tax bill while you keep your portfolio and checkbook intact:
Accelerate your mortgage payment. “You might get an extra month’s worth of mortgage interest deductions for 2006 by making your January payment in December,” says Sidney Kess, an attorney and CPA in New York. Put the check in the mail as early as possible so the lender can report it on IRS Form 1098 for 2006.
Defer income until 2007. If you’re self-employed, defer December billings until January. Expecting a year-end bonus? Ask your employer to give you the check in the new year.
Lose your losers. Review your portfolio and sell any stocks, bonds, or mutual funds trading at a loss since you bought them. “Selling losers may be worthwhile for an investment that’s gone down $1,000 or more,” says Matt Gordon, managing director of financial planning for Lenox Advisors in New York. “If your capital losses exceed your gains for the year, [then] net losses up to $3,000 can be deducted on your 2006 tax return.”
Max out your retirement accounts.
Contribute the maximum amount of money allowed to your company-sponsored 401(k) plan or other tax-deferred retirement account. Think you can’t afford it? Do the math: the payroll deductions reduce your taxable income and may actually increase your take-home pay.
Take last-minute deductions. This is the season for giving — especially tax-deductible donations. Consider donating appreciated stock rather than writing a check. For example, say a stock you bought years ago for $200 is now worth $1,000. If you sold that stock, you’d have an $800 long-term capital gain and owe $120 to the IRS, at a 15% tax rate. You could instead give the stock to a charity and get a $1,000 tax deduction — and not have to pay anything, Gordon explains.
A word to those who tithe or make large cash contributions to a church: A recent tax law change now requires that all tax deductible cash gifts be supported by a bank record or a letter from the charity specifying the date and amount of the donation. Therefore, it’s better to drop a check in the collection plate.