End of Year Tax Tips for Investors

Tax Breaks

End of Year Tax Tips for Investors

Got liquid assets like mutual funds or planning to buy them? Your investments will need some tending before the year comes to an end to make sure you're following a good tax strategy.

Act Now to Capture Zero Tax

If you’re a taxpayer in one of the two lowest income-tax brackets, remember that you can cash in capital gains tax-free. The 0% rate applies to long-term capital gains, as well as qualified dividends, scored before year-end by taxpayers in the 10% and 15% federal tax brackets. Likely candidates include unemployed workers, who may need to tap investments for income, and retirees, who may be in a low tax bracket thanks to an additional standard deduction for those 65 and older and Social Security income that is partially tax-free. Learn more: Tax-Free Capital Gains.

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Use Withholding to Your Advantage


Did you get healthy dividend and interest returns this year? Well, good for you. But remember that the IRS will want its cut, too. If you haven't been paying enough estimated tax on these earnings, remember that you may be able to make up the difference with paycheck withholding -- and avoid penalties. Learn more: Check Your Withholding.

Winning with Losers

Normally, at this time of year investors are scouring their portfolios for potential winners and losers to sell by year-end. The conventional strategy calls for harvesting investment losses to sop up investment gains, allowing you to walk away with some tax-free profits.

Uncertainty over the fate of income taxes in 2011 has left investors wondering whether they should instead focus on cashing in their winners before year-end, to lock in profits at a guaranteed 15% capital-gains rate, rather than risking a higher rate next year. But with a tax deal in the works on Capitol Hill, it looks like it will be business as usual. Learn more: Prepare for Year-End Tax Planning as Usual.


Some Gains You Don’t Want

With the midterm elections in the rearview mirror and the Federal Reserve poised to pump $600 billion into the economy, investors are feeling more confident about the future. But before you start pouring money into the stock market, consult your calendar. Buying mutual funds between now and the end of the year could trigger an unnecessary tax bill.

Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income.

That’s not how it works, though. Learn more: Don’t Buy a Tax Bill


Shelter That Income

There’s still time to trim your 2010 income-tax bill and boost your retirement savings at the same time. And if your nest egg is still suffering from the aftermath of the 2008 stock-market collapse, it could probably use a little extra TLC.

You have until December 31 to contribute up to $16,500 to your 401(k) or to other tax-deferred retirement accounts, such as a 403(b) for teachers and nurses, a 457 plan for police officers and other local-government workers, or the Thrift Savings Plan for federal workers and military personnel. That's the same maximum contribution level as last year, and it looks like 2011 will be more of the same. At the very least, try to contribute enough to capture all of your employer’s matching contribution. Otherwise, once the year ends, those unclaimed dollars are gone forever. Learn more: Trim Taxes by Boosting Retirement Savings.

Give Securities Not Cash


’Tis the season to share your bounty with the less fortunate or to support your favorite cause. If you’re in a charitable mood, consider donating appreciated securities -- stocks or mutual funds -- instead of cash. When you give $1,000 in cash, you get to deduct $1,000, and that saves you $250 in the 25% bracket. (Any state-income-tax savings are gravy.)

But let's say you have $1,000 worth of mutual fund shares that you bought more than a year ago for $500. If you sell the shares, you'll owe $75 in tax on the profit, even at the preferential 15% capital-gains rate. But if you donate the shares, the charity gets the full $1,000 (it doesn't have to pay tax on the profit when it sells), you avoid the $75 tax bill, and you still get to deduct the full grand. It's a win-win-win situation. Learn more: Charities: Give Stocks Instead.