Six tips to lessen the year’s tax bite
Heres the first first of two columns about things you can be doing today to help make tax time less taxing come April:Shifting income and controlling the timing of deductions and income between tax years. Certain deductions are available only above specified thresholds. For example, medical expenses are deductible only to the extent that they exceed 7.5 percent of adjusted gross income. You may need to group these expenses into a single year preferably the year of the lower income and lower threshold in order to exceed the threshold and take a deduction. Similarly, arranging for a year-end bonus to be paid in the year of the lower tax rate can reduce the tax on the bonus. Other expenses, such as charitable contributions, have no threshold. You may want to group these expenses in higher-income years, when your tax rate may be higher and the tax savings from the deductions greater.Timing purchases and sales of investments. Companies pay out capital gains and dividends at the end of the year. If you are planning to sell, be sure to do so before any upcoming dividend payment in order to recognize any resulting capital gain (or loss) instead of a taxable dividend, reducing the tax on the income. If you are planning to buy, be sure to do so after the dividend is paid so as not to buy the dividend and the taxable income.Capital gains and losses. Strategic asset allocation and rebalancing may provide opportunities to realize gains to offset losses. After offsetting capital gains, only $3,000 of capital losses can be used to offset ordinary income in a given year. Excess losses can be carried forward to future years until they are entirely used up.Converting to a Roth IRA. With many individual retirement accounts decimated by the bear market, taxpayers may find this a good time to convert their traditional IRAs to Roth IRAs, whose eligible earnings are not taxable on withdrawal. Because you pay regular income taxes on the money you shift to a Roth, the idea is to convert the smaller pool of assets into a Roth before any rebound in your IRAs value.Taxpayers who in the past couldnt qualify for a Roth conversion because their income was too high (over $100,000 for couples and singles) may qualify now if their income for the year is down. You must convert your traditional IRA to a Roth by Dec. 31. But be aware: its better to pay for the conversion taxes with money outside of the IRA potentially difficult in a bear market.Diversifying low-cost-basis stocks. If you have been waiting to diversify a large holding of low-cost-basis stock, or want to step up your cost basis, consider offsetting losses by recognizing gains before the end of the year. If you believe the stock will rise in the coming months or years, you can establish a higher cost basis by selling and repurchasing. If the sale produces a loss, wait at least 31 days before repurchasing. Or you can do the two transactions in the opposite order: buy a second position in the same stock and then sell the original shares at least 31 days later. (The 31-day waiting period is required to avoid a wash sale: the IRS will disallow a tax loss resulting from a sale if a substantially identical security is bought within 31 days of the sale.)If you plan to fund a childs or grandchilds college education, you may want to contribute to a 529 college savings plan. While you do not receive a federal income-tax deduction, many states offer deductions. Funds grow tax-deferred, meaning qualified withdrawals will be free of federal taxes, and (in many states) of state taxes. You will need to check the tax treatment for specific plans in your state. Many states offer tax advantages only to in-state plans. You can also front-load a 529 plan, removing up to five years of gift-tax exclusions from your taxable estate. If you are using a Coverdell Education Savings Account, you now have until April 15, 2008 to make contributions for 2007.Please consider the investment objectives, risk, charges and expenses carefully before investing in a Section 529 College Savings Plan.The official statement, which contains this and other information, can be obtained by calling your financial adviser. Read it carefully before you invest.Provided courtesy of Fraser M. Horn and Dudley M. Irwin, investment advisers with Berthel Fisher in Edwards. For more information, call 926-2500. This article is intended for investment planning purposes only and is not intended as a recommendation to buy any of the companies mentioned.Registered Representative of and securities offered through Berthel Fisher & Company Financial Services, Inc. Member FINRA/SIPC. 1st & Main Investment Advisors is independent of BFCFS.