Are you shying away from making essential financial decisions in the midst of the current economic uncertainty? Although there has been a tremendous amount of attention on the anticipated tax law changes for 2009, time is running out to reduce your 2008 tax bill. In this newsletter I am going to share with you a few tax breaks to be thankful for this year. Make sure you talk with your own tax professional to learn more about these techniques, others not mentioned here, and determine the best options for your unique situation.
Tax Gain/Loss Harvesting For many investors, tax gain/loss harvesting is the single most important tool for reducing taxes now and in the future. If properly applied, it can save you taxes and help you diversify your portfolio in ways you may not have considered. Although it cannot restore your investment losses, it can certainly soften the blow. For example, a loss in the value of Security A could be sold to offset the gain from selling Security B, thus eliminating the capital gains tax liability of Security B. This strategy can be especially beneficial for the veteran investor who has been in need of rebalancing their portfolio for quite some time, but neglecting to do so to avoid capital gains taxes.
Get Out of Jail Free Card High cost tax-deferred annuities are the most oversold and unneeded products sold by commission-based stockbrokers and insurance agents. Many times, investors do not realize it until it is too late. Annuity surrender charges and tax laws make it difficult for investors to get out of the situation. Ordinarily, a policy holder would have to pay income tax and tax penalties on the earnings from the annuity policy. With the recent significant decline in the stock market, many annuities purchased over the last few years are sitting in a loss position. If this is the case, you would owe no income tax or additional tax penalties on the policy you decide to cash out.
Charitable Donations of Appreciated Securities When you donate stocks or mutual fund shares you have held for more than one year, generally you may deduct the fair market value of the securities on Schedule A of form 1040. In addition, you can avoid paying capital gains taxes on the appreciated value of the securities. Your donation is made without negatively impacting your current cash flow budget and you essentially create a double tax savings. In addition, charitable contributions is one of the few deductions that is not phased out due to income thresholds, so your good deeds get the full credit with the IRS.
Closing Remarks It is common for people to make the mistake of placing too high of importance on tax schemes. In fact, during times like now it is more important to focus your attention on the fundamentals that must be done well to ensure future financial freedom—saving and investing for the long-term. So, despite what your tax professional may tell you, there is more to be thankful for than just tax breaks.
I would like to end by giving my thanks for all the blessings from God above and the love of my family and friends. I am thankful to live in our great country where we have rights, freedoms, and the determination to make it through this difficult time period. Have a Happy Thanksgiving!