Less than 10 Days Left to Reduce Your 2006 Taxes
Here are a few more tax tips to consider before January:
Used Car Donation: If you are considering donating a used car to a charity, be sure to check if the charity plans to use the car or sell the car. If the charity plans to use the car, it may yield a higher deduction for you. See IRS’s A Donor’s Guide to Vehicle.
Stock Sales: If your trades so far in 2006 have resulted in a net gain, take a hard look at the securities in your portfolio that show paper losses. Maybe now is the time to unload some of those stocks, using the loss to sop up the gain on other deals and pull down your tax bill
On the other hand, if your sales so far have produced a net loss, perhaps you should go in for some year-end profit-taking. Only $3,000 of net losses a year can be used to offset income other than capital gains, so if you have a bigger loss, you have an incentive to cash in some of your other profits. Because the loss will offset additional gain dollar for dollar, you can add to your income without adding to your tax bill.
Of course you don’t let the “tax tail wag the investment dog,” by allowing the search for tax savings to lead you into bad investment decisions. Your investment goals must be paramount. But if a particular investment is on the sell-or-hold borderline, perhaps the tax consequences can be decisive.
Tax Free IRA Distributions: Do you know that a new tax law was passed for taxpayers who are at least 70 ½ in age and required to take distributions from their IRAs? The Pension Protection Act allows these taxpayers to donate money (up to $100,000 per year) to a charity directly from their IRA account. The IRA distributions for those contributions will be tax-free.
Note: since the distribution will not be included in taxable income, the taxpayer will not be able to claim a tax deduction for these charitable contributions on Schedule A. This special contribution from an IRA account is only good for tax years 2006 and 2007.
Federal gift tax: You can give away as much as $12,000 a year to any number of people without triggering the federal gift tax. The tax-free amount doubles to $24,000 if your spouse joins you in making the gift. You don’t get an income tax deduction for such gifts unless the object of your generosity is a qualified charitable organization (and in that case, the $12,000 limit doesn’t apply).
But there’s an important advantage: Assets given away during your life—and any future appreciation—won’t be in your estate to be taxed after you die. And income generated by the gift is taxed to the new owner, not to you. (If you give assets to your own children, however, the income can be taxed in your tax bracket until the children reach age 18.)
Note: Be careful if you are thinking about buying back that stock that you just sold at a loss. Under the “wash sale” rule, you can’t deduct the loss if you buy the same stock within 30 days before or after you sell it. If you think the stock will eventually rebound, check the calendar before you buy it back.