FINANCIAL
PLANNING - PLANNING FOR TAX SAVINGS SHOULD START EARLY
Get
a Head Start on Tax Savings by Planning Early By Jeffrey E. Blum, RPC
Now is the time to get a jump-start in the annual race to
reduce your tax bill. While tax time is not for a few more
months, it’s not too early to begin thinking about strategies
that can help you take control of your tax bill.
Consider gifting appreciated securities. With long-term
capital gain taxes at a maximum 15 percent rate until 2008,
the tax bite is considerably less when you sell securities
at a profit. The tax cost could be even less if you gift appreciated
securities to family members in the 10 percent and 15 percent
tax brackets because they currently enjoy a five percent rate
on long-term capital gains as long as they remain in those
brackets.
For example, if a child or grandchild is in the 15 percent
tax bracket and the eventual sale qualifies for long-term
capital gain treatment, you may want to gift the securities
to the child or grandchild. If he or she sells them –
perhaps for college education expenses – for example,
the gain will be taxed at only five percent.
You’ll also want to think about gifting long-term appreciated
securities to philanthropic organizations. By gifting securities
instead of cash to the charity, you don’t incur the
capital gains tax liability you would if you sold the securities
yourself. In addition, you may be able to take a charitable
deduction for the fair market value of the securities on the
date of your gift. Don’t get caught by the wash sale rule.
As you know, you can use capital losses to offset capital
gains and reduce your tax burden on securities you sell. However,
before you do this, it is important to understand the wash
sale rule. This comes into play when your goal is to maintain
your position in a security but recognize a capital loss in
that same security. To do so, you might consider selling the
position – and realizing the capital loss – and
buying the same security. That’s where things get tricky.
The wash sale rule does not allow a tax loss if you buy the
same or substantially identical security within 30 calendar
days before or after the trade date – a total period
of 61 days. This rule is designed to ensure you take the risk
of being out of the market in that security to claim a tax
loss.
To avoid the wash sale rule, many investors take advantage
of a strategy called doubling up. Before selling your loss
position, you purchase the amount of shares you want to own.
You then wait until 31 calendar days after the trade date
to sell your original position, creating the loss. The last
day to double up this year is Nov. 29, 2005 to claim a loss
in your 2005 return.
Take your required minimum distributions.
Once you reach age 70 _, you must take required minimum distributions
from your traditional IRAs and qualified employer-sponsored
retirement plans, such as 401(k) plans. If you fail to take
these distributions, withdraw less than you are required to
or miss your deadline, you could be subject to a 50 percent
IRS penalty on the difference between the amount you should
have withdrawn and what you actually withdrew.
These distributions must be taken by Dec. 31 each year. An
exception to this rule applies only to your first distribution,
which you can postpone until April 1 of the year after you
turn 70.
Now is the time to meet with your financial consultant and
your tax advisor to discuss strategies to help you better
prepare for tax season.
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A.G. Edwards does not render legal, accounting or tax preparation
advice. You should consult your tax and legal advisors for
questions regarding your specific situation.
