As the year draws to a close, take time out from gift shopping and party hopping to make a few tax moves that will save you money when you file your 2011 return next year.
Selling stocks, bonds, or funds at a loss has several tax advantages. Capital losses can offset any capital gains you've taken this year, reducing or eliminating the tax liability. Losses can also trim the tax you'll owe on capital-gains distributions from mutual funds. And if your capital losses exceed your capital gains, you can deduct up to $3,000 in net losses from your ordinary income, thus lowering your tax bill for 2011. Losses of more than $3,000 can be carried over to future years with no limit.
Remember that you can't take a capital loss right away if you immediately buy back what you sold. If you do, the loss will be included in your basis in the repurchased security, reducing the tax on a future sale, says Marty Abo, a CPA in Mount Laurel, N.J. If you want to maintain your investment strategy yet nail down a capital loss for this year, you can either buy something similar right away or wait more than 30 days and then buy back what you sold.
If you want to make a year-end charitable donation, consider giving appreciated securities that you've held in a taxable account for more than one year. "You can take a deduction for the fair market value of the security and avoid paying capital-gains tax on the appreciation," says Lisa Osofsky, a partner at WeiserMazars LLP, an accounting firm in New York.
Say you want to give $5,000 to a tax-exempt charity. You have $5,000 worth of fund shares you bought years ago for $2,400. Those shares are worth only $4,610 to you because selling them would generate a 15 percent tax on the $2,600 long-term capital gain, or $390. If you donate the shares, you'll get a $5,000 deduction and the charity can keep the entire amount after a sale. To do this, start the process a few weeks before the end of the year to make sure the shares are transferred in time for a 2011 deduction, says Ed Mendlowitz, partner in the CPA firm WithumSmith Brown in New Brunswick, N.J.
When you convert a traditional IRA to a Roth IRA, you're exchanging a tax-deferred account for one that eventually will be tax free. After five years and age 59½, all Roth IRA withdrawals avoid income tax.
But you must pay tax on the amount you convert. After the recent market setbacks, there's a good chance your traditional IRA has lost value, making a conversion less taxing. If you convert any time in 2011, the five-year clock for tax-free withdrawals starts on Jan. 1, 2011. What's more, you can reverse all or part of a 2011 Roth IRA conversion until Oct. 15, 2012, if your investments lose value after the conversion.
If you're older than 70½, you generally must take required minimum distributions (RMDs) from your traditional IRA and from company plans such as 401(k)s. Take less than the required amount and you'll owe a 50 percent penalty on the shortfall.
Taxpayers who reach 70½ in 2011 have another decision to make at year's end. Technically, you don't have to start RMDs until April 1, 2012. But you'll have to take a second RMD by Dec. 31, 2012, and by every Dec. 31 afterward. You might prefer to take the first one by the end of 2011 to avoid piling up two RMDs in 2012, which could push you into a higher tax bracket.
In 2011, taxpayers over age 70½ can make charitable contributions of up to $100,000 from their IRA. You won't get a tax deduction for the donation but you can satisfy your RMD obligation without owing tax on the distribution. $
You can deduct unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. So if your AGI in 2011 is $100,000, your threshold is $7,500. With $8,500 in unreimbursed medical expenses, you'll qualify for a $1,000 write-off if you itemize deductions on Schedule A of Form 1040.
You might be surprised by which medical expenses are deductible. You can find the list in IRS Publication 502, "Medical and Dental Expenses," at www.irs.gov. For example, after-tax dollars spent on health-insurance premiums are deductible; that includes Medicare Part B and D premiums. The list also includes acupuncture, hearing aids, laser eye surgery, and weight-loss programs for a condition diagnosed by a physician.
Before the end of 2011, add up your unreimbursed medical expenses so far. If you're at or near the threshold, you might want to schedule and pay for elective items, such as dental implants, by Dec. 31, 2011. If you're far from the threshold, defer such outlays until 2012, when they might help you move into tax-deductible territory.
This article appeared in Consumer Reports Money Adviser.