TAX PLANNING STRATEGIES
by Curtis Finch, C.P.A.

CAPITAL GAINS

When many of us look at our portfolios, we see virtually nothing but losers. But just because your losers outweigh your gainers doesn't mean you can't ease some of the pain before the end of the year. There are some moves you can make that might not only spruce up your tax bottom line, but might also help you make critical decisions about the stocks, bonds, and mutual funds that you hold. So let's take a look at some of things that you can do to take a bicuspid out of your tax bite this year.

Bail!

If your portfolio is underwater, don't forget to bail and take your tax losses. You can take up to $3,000 in capital losses (either long- or short-term) against your other income. If you're in the 27% bracket, selling enough loser shares to generate a $3,000 loss will save you about $1,000 in taxes.

Net!

Perhaps your portfolio actually does include some appreciated shares that you are no longer interested in holding. You can use capital losses to offset those capital gains, and thus reduce your tax bill. For example, say that you sell shares for a $7,000 gain.

That will allow you to use $10,000 in losses to offset the $7,000 gain, and then take the remaining $3,000 in losses against your other income.
Also remember that capital gains might come from sources other than sales of stock. It's possible that you'll be receiving a long-term capital gain distribution from your mutual funds. You might have sold an investment or rental property at a profit. You might have even made a profit on a second home that you sold. Those gains can be offset by losers that you sell in your stock portfolio!

Convert!

Generally, you want your losers to be short-term, and your winners to be long-term. That might not mean much if everything you're selling is at a loss. But if you're looking at a net gain, try to do whatever you can to make that final net gain long-term in order to secure your preferred tax rate on long-term capital gains. You might want to convert some long-term losses into short-term losses in order to keep your long-term gains intact. So make sure to pay close attention to how you "net" your stock sales.

Swap!

This technique works especially well with mutual funds. Say you own mutual fund shares in the Able Value Fund, which have decreased significantly since you purchased them. You'd like to stay with a value fund, but you're not married to the Able fund family. How about swapping those shares for shares in the Baker Value Fund? You'll sell your Able shares for your tax loss, and immediately buy shares in the Baker Value Fund. So while you're still a value fund participant, you've swapped fund companies and have generated a tax loss for the end of the year.

Wash!

A similar technique that you can use for stocks is to sell you loser shares in Chip Company A, take the tax loss, and turn around and purchase shares in Chip Company B. You like the chip sector from a long-term or value standpoint, and don't want to completely get out of the industry. This technique will generate you the tax loss you desire, but allow you to remain in the chips (so to speak).

How about simply selling Chip Company A and turning right around and re-purchasing that same stock? Well, if you do that, you'll run afoul of the dreaded wash sale rules, and your loss will be ignored for tax purposes. Similar mutual funds, or even stocks in the same industry, are not considered "similar" for wash sale purposes, so you can make these moves without fear of the IRS's wrath. But when your repurchased shares are virtually the same as what you sold, the wash sale rules will kick in and ruin your day.

Dump!

Do you have shares in your portfolio that have been de-listed? They might be technically "worthless" in the eyes of the IRS, and you might be able to take a worthless-stock loss deduction without even selling anything. That might help you rid your portfolio of these dogs without even touching any of your other holdings.

But the term "worthless," in the eyes of the IRS, has a bunch of technical components tied to it. Simply because the shares are de-listed or even if the company is in bankruptcy doesn't necessarily mean that the company is eligible for the worthless-stock deduction. But there are ways that you can still rid yourself of this junk by selling it to an unrelated party, making the sale complete, deducting the loss, and not having to worry if the junk is considered worthless in the eyes of the IRS.

These are just a few ideas to help you cut your taxes while pruning your portfolio. You might use one, two, or none of them -- that's up to you. We just want you to understand that you do have choices and alternatives when dealing with year-end tax planning issues even if you're dealing with a portfolio currently residing at the bottom of the sea.

ESTATE TAXES can be avoided now by making annual gifts to family members up to $11,000 per recipient, up from the previous limit of $10,000. These gifts are free of gift taxes and a couple can give up to $22,000 per year to each recipient. But watch out for late December payments! If the check doesn't clear your bank until January, the IRS may claim the gift applies to 2003.

DEDUCTIONS may throw off your year-end cash position, but accelerating spending in 2002 will lower your tax bill if you are a cash basis taxpayer. Buy your 2003 supplies before year-end and pay for them partially with your April tax savings. If you make estimated tax payments to the State of Georgia, pay your 2002 payments by December 15th and deduct it on your 2002 return.

Making charitable donations now that you'd normally make early in 2003 can boost this year's deductions. Another great way to increase your deductions for 2002 is to pay your January 2003 home mortgage payment that's due January 1st by December 31st of 2002. (must be received by your lender and posted to your account prior to 12/31.)

ANY BUSINESS EQUIPMENT placed in service before December 31st can yield an easy last minute deduction for small business owners. This law allows us to sidestep complex depreciation rules and lengthy write off periods to secure an immediate deduction up to $24,000.

USE YOUR CREDIT CARD!

If you have year-end deductible expenses you can use your credit card to make the purchase in 2002, take the deduction in 2002, and pay your credit card bill in 2003. You see, when you pay with a credit card, the IRS considers the expense deductible in the year that the charge is incurred... and not necessarily when you pay the credit card charge. In fact, you can even find charitable organizations that accept credit cards for charitable contributions. With the right credit card, you can receive a 30-day "float" that amounts to an interest-free use of the bank's money.

RETIREMENT PLANNING is the one area that doesn't end with the turn of the calendar. You have until April 15th, 2003 to fund a pre-tax IRA if you are not covered by a retirement plan at work or through your business. Or you may fund a ROTH IRA subject to certain income limitations. Business owners have until the filing date of the corporate return, including extensions to fund their SEP or Keogh. Business owners may also contribute to a defined benefit plan under new tax laws. Contact our office for more information.