Adjusting Your Investments for Tax Savings
2011 was a hard year for many and most investors who lost significant
chunks of their investments with the drops in the markets. As 2011 comes
to a wrap, this may be a good time to adjust your investments so as to
take a tax savings. Below are some moves you may consider;
Making a Charity Donation from your IRA Fund
For the 2011 tax year, taxpayers will be allowed to donate their IRA
funds directly to charity organizations as long as they are 70.5 years
old and such donations are made directly to qualifying charities. Such a
donation will be tax exempt as long as it is within the cap of $100,000.
However, this tax benefit is not available in 2012 unless Congress passes
a law to extend the benefit. Therefore, tax professionals are advising
that taxpayers consider making such a donation before the year's end to
enjoy the benefit. However, the mood in Congress is that an extension
will be made for this tax benefit at least until end of 2012.
Adjusting Your IRA
Taxpayers who transferred their traditional IRAs to Roth IRAs within 2011
can re-characterize the move by reversing the funds back to a traditional
IRA before year end or before the allowed timelines so as to avoid paying
taxes on the retirement fund. Earlier in the year, many taxpayers
transferred their IRA from traditional to Roth. This is because the funds
had significantly lost in value with the markets and tax professionals
advised taxpayers to pay tax on the depreciated fund to have funds
converted to a Roth account. This way, any appreciations and withdrawals
under the Roth account would be tax exempt. However, some of the funds
that were transferred to a Roth account lost further value. Therefore,
since tax is paid on value at the time of conversion, the taxpayer will
be expected to pay taxes for funds that they have already lost. However,
if they re-characterize the fund by converting it back to a traditional
account, they get to avoid paying tax. They can make another conversion
to Roth later on. To avoid paying taxes on conversion, one needs to re-
characterize within a given time-line.
Handling Your Stocks
There are two ways that you can handle your stock portfolio to save on
taxes. With the shares that have lost in value as the markets went down,
it may be wise to consider selling such stocks. If you still wish to keep
the stocks, you can buy them back next year. There should be no much
movement in stock prices between now and next year. By selling the
depreciated stocks, you get to claim a deduction against Capital Gain
loss. However, such stocks need to have been in your portfolio for more
than a year. If you wish to donate depreciated stocks to a charity, it is
advisable to sell the shares, claim the Capital Gain loss, and donate the
sales proceeds. On the other hand, in the rare event that some stocks
significantly appreciated in value, it is more advantageous to donate the
stocks to charity organizations as they are. This way, you get to take a
tax deduction on the market value and not the purchase price. You also
avoid paying capital gain tax.