Wes Moss: 3 ways to prevent holiday tax bite

Wes_Moss-for-Web-smaller-fiCertified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

How was your Thanksgiving? Hopefully it was great. And by now you have shooed away your visitors and are ready to take on that all-important December task. You know, the one that can affect your wallet for months to come?

No, not holiday shopping … tax planning!

On my Money Matters radio show we constantly remind listeners that it’s not what you earn, it’s what you keep that determines personal wealth. Capital gains taxes can do serious damage to your portfolio’s rate of return. Income taxes can make you wonder why you even bother going to work. When you visit a CFP® Professional you should address both of these issues by asking:

  • What can I do to save more of my income from a tax perspective? Possible answers include deferring a larger portion of your salary into a retirement plan or devising a strategy that utilizes more deductions.
  • What investment strategy is most tax efficient for me? This conversation will include an examination of whether tax-free or tax advantaged investments – municipal bonds, *MLPs and Energy Trusts – make sense for you.

*MLPs are “Master Limited Partnerships” that trade just like stocks. MLPs are typically involved in the commodity, energy and natural resource industry. They can offer investors potential tax advantages because a “portion” of the income earned from an MLP may be tax deferred.

So, as 2010 winds down there are a few things you can do to lower your bill to Uncle Sam. As always, be sure to talk to your personal CPA or tax advisor about your specific tax situation.

1. Tax-loss selling: Take advantage of a stock market that is up over 70% in the past 2 years. If you need to rebalance your portfolio, you may want to sell stocks that have significant gains over the last two years. Let’s say you have $5000 worth of “gains” in your brokerage account (this strategy does not apply to a “retirement account” such as an IRA or ROTH) from selling a stock or mutual fund. Now, find other stocks in your portfolio with losses that total $5000 that can be sold to offset those gains. HINT: In order to actually count as a loss, a stock must be sold for less than what you paid for it, in essence the loss is “realized”. This can be a nice way to significantly reduce what you may owe in capital gains tax.

2. Watch for costly payouts: Many mutual funds distribute their capital gains at the end of the year. That means that you could buy a fund on Dec. 15, hold it for only one day, and if the fund gives a “distribution” on Dec. 16 you will be responsible for the full taxable distribution as if you had held the fund all year long! So be careful – if you are planning to invest new funds this time of year, look to ETFs (Exchange Traded Funds) that will have very limited or no distributions before year end.

3. Make January mortgage payment in December: This allows you to take an additional deduction for interest paid. Remember to add the January interest to the amount reported on the 1098 you receive from your lender.

Again, it makes sense to consult the appropriate advisors when discussing tax strategy. Most CFP® Professionals are not licensed to provide complete tax advice. Bring your advisors together. Your investment professional and CPA should talk occasionally to ensure that the hand of investment planning is well protected by the glove of tax planning.

6 comments Add your comment

Dawgs Win

November 29th, 2010
4:51 pm

I heard you on the show this weekend talking about a list of more tax tips. Am I able to find more of these types of tax tips or some of the ones that were discussed on the show? My family and I find them very useful as the year winds down.

David Ayers

November 29th, 2010
4:56 pm

Double the mortgage payment in December… I actually haven’t heard that one before

Wes Moss

November 29th, 2010
5:17 pm

yes…we did 12 Tax Tips on Money Matters this weekend…3 of them are in this post, and the full list of 12 can be found here at http://www.yourwealth.com/images/docs/cat_2010_tax_tips.pdf
There were LOTS of great call-in questions this week on the show!

Rick Foll

November 29th, 2010
5:32 pm

I also like the idea of paying your January mortgage in December, but with this already being the bulk of my expenses, it seems to be kind of difficult for the average earner… Especially in a month that is filled with holidays, December tends to be one of the more expensive months, thus straining the monthly finances.

Jenny Clayton

November 30th, 2010
9:06 pm

Wouldn’t you only be able to do the early payment once? After you do this, how would you ever be able to take advantage of it again/?

Ole Guy

December 3rd, 2010
11:16 pm

Tax-deferred plans sound great…in theory. Keep in mind that, following years of irresponsible taxcuts, the ax is a-gonna fall within the next year or so. When it does, it’s not gonna be a pretty sight for those (me) taking distributions from traditional IRAs initiated in the 70s and 80s. The tax bites, in 30-or-so years, when taking distributions, could conceibably cast a black cloud over the tax advantages realized in year one.

Far better to pay the tax in the year of contributing to the IRA, take a ROTH, and let father time make you a millionaire (not that a million bucks, in the early years of retirement, will necessarily be that big a deal. But at least you won’t inherit the tax bill at distribution.).

Either way, it’s a guaranteed crap shoot. Educate yourselves on all the ramifications and DO SOMETHING. Good Luck and Godspeed!