You’ve lost money on your investments, and maybe your job is shaky too. And, to top if off, you could be approaching a year when your taxes also might be going up.
There’s not much you can do about the stock market. But with the tax year coming to an end, you might be able to take steps that will require Uncle Sam to absorb some of your pain and perhaps insulate you from more distress next year.
This time of year, the rule of thumb in tax planning generally is to delay receiving income and to push as much as possible into the next year if you think your tax bill might be lower then. But if you are close to the $250,000 income level that President-elect Barack Obama said he’d use for raising taxes, experts say your instinct to delay a bonus or bill a client next year might not be the best idea.
“Your taxes are going up,” said certified public accountant Randy Frischer of BDO Seidman. “It’s just a matter of time. So if you are making over $250,000, plan for a tax increase.”
Even if your income is below $250,000, he said, taxes can go up in less direct ways. For example, he said, Congress could cut your favorite deduction.
Specifics are not clear, but here’s what tax experts suggest doing:
Take investment losses
If you have lost money on stocks, bonds, mutual funds and real estate, you can use the losses to reduce your income taxes this year and in the future.
To use the tax loss, you have to sell the investment. The loss has to be based on the purchase price, and it pertains to investments in taxable accounts, not individual retirement accounts and 401(k)’s.
Under tax laws, you use losses first to offset any gains realized this year on investments. Then, if you have losses remaining, you can reduce your taxable income up to $3,000. If still more losses remain, you can carry those forward into future tax years to reduce your income and taxes until the losses are used up.
Be aware of sneaky gains
Maybe you didn’t sell anything this year, so you figure you have no capital gains.
You could be wrong. Many mutual funds have been selling some of their strongest stocks this year to raise cash for investors leaving the funds. And you will be taxed on those gains through what’s called a distribution, even if your fund has lost thousands of dollars of your money this year.
To offset such a gain, tax attorney Barbara Weltman, author of “J.K. Lasser’s Guide for Tough Times: Tax and Financial Solutions to See You Through,” suggests selling shares of a losing investment. Often, investors don’t like to do this because they don’t want to cement a loss. But selling doesn’t have to mean parking the money in cash.
Under tax rules, you must wait 31 days before repurchasing a stock or fund you sold to capture a loss. Instead of waiting, Martha Pomerantz, an investment principal with the Lowry Hill private asset-management firm, suggests investing money immediately after the sale in something else that will keep you in the stock market. For example, an investor selling a fund that invests in large U.S. companies could reinvest the money in exchange-traded funds that mimic the Standard & Poor’s 500 index.
Take gains now
If you have been debating whether to sell a stock or mutual fund that has risen in value since you purchased it, you might want to sell some now while capital gains taxes are low. During the election campaign, Obama suggested the possibility of an increase in capital gains taxes, perhaps to 20 percent of the gain from the current maximum of 15 percent.
People in the lowest income brackets, or couples under $65,100, now can sell winning investments and pay no taxes on the gain.
Weltman said it’s not clear whether capital gains taxes will change, but if, for investment purposes, you think selling might make sense, you could insulate yourself from a possible increase by selling some this year.
Convert an IRA to a Roth IRA
If taxes increase in the years ahead, you are likely to prefer having retirement savings in a Roth IRA rather than a traditional IRA.
You have to pay taxes on any money you remove from an IRA. But you don’t have to pay taxes on money removed from a Roth IRA, provided it has been in the account for five years and you are at least 591/2 years old.
To avert the possibility of higher taxes in retirement, you can convert a traditional IRA to a Roth IRA, as long as you are willing to pay taxes on the IRA when you do it. Now could be an excellent time because the value of your IRA may well have plunged with the stock market. That means your tax bill on a conversion could be a lot lower than it might have been a year ago.
You can’t convert an IRA to a Roth if your income is more than $100,000. If you can’t afford the tax on the full IRA, you can convert part of it.
Don’t judge by the past
If you lost a job this year or are retired and living on a lower income than the past, you might be able to use deductions that weren’t available previously, said Bob Scharin, senior tax analyst for the tax and accounting business of Thomson Reuters. For example, to take deductions for medical expenses, they must total 7.5 percent of your adjusted gross income. With a lower income, you might be able to make the hurdle.
To increase your chances this year, squeeze in doctor visits, medical procedures or purchases like glasses, elective surgery or hearing aids by year-end, Scharin said.
Pay your property taxes
If you are debating whether to pay your property tax at the end of this year or the beginning of next year, you may want to make the payment this year. Under new tax rules, said Mark Luscombe, principal federal tax analyst at tax publisher CCH, you can deduct some of the property tax even if you use the standard deduction on your income taxes, rather than itemizing. If you are single, the limit is $500. For couples, it’s $1,000.
Luscombe said this can be especially attractive to older Americans who have paid off their homes but still face property taxes.
Of course, if you think you will be subject to the alternative minimum tax, you could find it smarter to delay paying the property tax until next year. The property tax deduction won’t help you out if you must pay the AMT.
Get your stimulus check
If your income was too high to qualify for the stimulus check that was handed out by the government this year, you might have another chance. If you recently lost your job, and your 2008 income will be lower than last year’s, you might qualify for the rebate, Scharin said.
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Gail MarksJarvis is a Your Money columnist. Contact her at gmarksjarvis@tribune.com
