Why the Time for Tax Planning is Now


With fall in the air, it’s time to pull sweaters out of storage, to stock up on leaf bags, and to do a spot of tax planning.

Tax planning? With the tax filing deadline some eight months away?


Though returns aren’t due until April, they cover a tax year that ends Dec. 31. Some of the best tax-reducing moves really need to be done by mid-November or early December. They often take some advance planning. Getting a head start in September could make you a lot happier in April, giving you a bigger refund or a smaller check to write to Uncle Sam.

Here’s a quick rundown on key tax strategies:

Income and expenses. For most taxpayers, it pays to postpone income so tax is due the following year. That allows you to keep earning interest on money that otherwise would be used for paying taxes. For the same reason, it makes sense to speed up tax-deductable expenses.

Think about ways to postpone a year-end bonus or delay billing your customers so that you won’t receive payments until the start of 2010. If you run a business consider buying new computers or other equipment and write-off-able supplies before year-end.

Mutual fund hazards. Mutual fund companies are required to pay investors the net profits earned on stocks, bonds or other holdings sold by fund managers during the year. Unless you have the fund in a tax-favored account like a 401(k) or IRA, these year-end distributions are taxable even if the money is reinvested in more fund shares.

You can avoid this tax by postponing a fund investment until after the distribution has been paid. Missing the distribution won’t cost you anything because fund share prices typically fall as the distribution removes assets from the fund, so that shareholders are no wealthier after the distribution than before.

Most fund companies provide advance notice, usually in October and November, of distributions they expect to make a month or so later. So, before making any fund purchase, ask about upcoming distributions. If that information is not available yet, get the distribution history to see if the fund has made big payments in the past. This information is usually available online.

Of course, tax matters have to be balanced with investing strategies. If you’re convinced a fund is about to take off, it might pay to invest right away rather than wait.

Sell losers. If they are sold by the end of the year, money-losing investments can create valuable tax losses. Those can be used to offset gains realized on other investments that were sold. In addition, up to $3,000 in losses can be used to reduce ordinary taxable income. That could save you $750, assuming a 25% tax bracket.

But don’t let the tax tail wag the investing dog. It would pay to forgo the tax loss if your money-losing investment were to turn around.

Keep winners. There are two reasons not to sell a profitable investment that seems to have run its course. By postponing the sale until after the year, you can postpone tax on the gain until the next tax year. Also, it can pay to hold on to a winner until you’ve owned it for at least 12 months, so you will be taxed at the long-term capital gains rate, no higher than 15%, rather than the short-term rate, which can be as high as 35%.

Again, taxes are a secondary consideration. Don’t keep your investment if you think it’s about to tumble.

In evaluating any investment, winner or loser, focus on how you expect it to do in the future, not how it has treated you in the past. Ask: “Would I buy it today at today’s price?” If you would, keep it. If not, get rid of it.

Year-end tax planning is a lot easier if you don’t have to paw through a lot of paperwork to get the figures you need. By using financial software, such as Quicken (Stock Quote: INTU), you can have all the data at your fingertips.

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