Tax rules can take some of the sting out of investment losses

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While losses in your stock portfolio may give you plenty of headaches, the losses may have a tax upside. Consider the following strategies between now and the end of the year to restructure your portfolio in a tax-efficient manner.

Taxpayers are allowed to offset capital gains (such as from the sale of stocks) with capital losses. If capital losses exceed capital gains for the year, up to $3,000 of losses can be deducted from other income, such as wages. Any loss greater than that can be carried forward to future years. It’s important to remember that stocks you’ve owned for more than one year (called long-term) must be grouped together for purposes of calculating the capital gain or loss. The same is true for stocks held for one year or less (short-term).

Here’s the strategy. When you identify stocks in your portfolio that have lost value and are no longer worth holding, consider selling those securities and offset all but $3,000 of the loss by also selling stocks that have gained value. This is known as “tax loss harvesting,” and it can be an effective method for rebalancing your portfolio without paying capital gains taxes.

You can often manage the size of your gain or loss when you decide to sell some, but not all, of a particular stock or mutual fund. To do this, you must have kept good records of the date and the price for each block of shares purchased. By selling the highest cost shares first, you’ll minimize your taxable gain or maximize your loss. You must specify the particular shares you are selling at the time you sell.

On the other hand, you may see the current market as a buying opportunity. If you are considering an investment in mutual funds, pay special attention to the fund’s proposed date for capital gains distributions. Mutual funds generally distribute all capital gains to investors toward the end of the year.

If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price. To avoid this outcome, call the fund and ask for the ex-dividend date and the estimated payout, and make your purchase after that date.

For assistance with the year-end tax planning connected with your investments, give our office a call.

Shopping tip: Give financial gifts this holiday season

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Individual Taxes

When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.

Some financial gift options you might consider:

* U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I-bonds are indexed for inflation and can provide some attractive rates of return.

* IRAs (regular or Roth). For 2010, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.

* Stocks or mutual funds. Equities are a good way to introduce a child to the investment world.

* Collectible stock certificates. Vibrant framed certificates are available for many companies. A Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful reminder of the importance of investing for the future.

* Collectibles. Postage stamps or coin collection kits can provide years of enjoyment and form the basis for some life-long hobbies. An interesting gift idea is an official U.S. mint proof coin set for the year the child was born.

Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.

New restrictions on health accounts (FSA/HSA)

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Tax Savings - Flexible Spending Plans

This year a tax advantaged health account (such as a flexible spending account, health reimbursement account, health savings account, or medical savings account) can be used to purchase aspirin, flu medications, allergy pills, cold medicines, and other over-the-counter medications.

Effective January 1, 2011, funds from these accounts can no longer be used to purchase over-the-counter drugs unless the taxpayer has a prescription for them. Insulin is an exception and can still qualify without a prescription.

One tip – If an over the counter medication is required by you Doc, have them write you a perscription and it will still able to be deducted!

1099 reporting for rental-property owners in 2011

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The Small Business Jobs Act created a reporting requirement for individuals who receive income from rental real estate. Starting in 2012, they will have to provide 1099s to any service provider to whom they pay more than $600 during the year. This means that starting Jan. 1, rental property owners should start keeping records of payments and collecting Form W-9 information.

More information on the new “Small Business Jobs Act”

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Hire Act & Jobs

“The Small Business Jobs Act of 2010,” signed into law on September 27, creates several tax-saving opportunities for businesses. Here’s a summary of the key tax breaks.

* Section 179 deduction. The new law doubles the maximum amount that can be deducted for business equipment purchases to $500,000 annually for 2010 and 2011. Also, the dollar threshold at which the maximum deduction is phased out is increased from $800,000 to $2 million.

* Bonus depreciation. The new law revives the 50% bonus depreciation for qualified property placed in service in 2010 (through 2011 for certain property).

* Start-up expenses. For 2010, the maximum first year deduction for qualified costs of starting a business is increased to $10,000, with a $60,000 phase-out threshold.

* Qualified small business stock. Investors in “qualified small business stock” may be able to exclude 100% of the gain from the stock’s sale if it is held at least five years (for acquisitions from September 28, 2010, through December 31, 2010).

* Business credits. Normally, general business credits can’t offset alternative minimum tax (AMT) liability. The new law removes this restriction for an “eligible small business” and permits carrybacks of general business credits for five years.

* Health insurance. For 2010 only, self-employed individuals can deduct health insurance costs from their self-employment income in computing self-employment tax.

* Cell phones. The new law removes strict substantiation requirements for cell phones and similar devices used in business and treats employee use as a tax-free fringe benefit.

* Roth accounts. Participants in 401(k), 403(b), and 457(b) plans can now roll over funds to a Roth account. For rollovers in 2010, the resulting taxable income can be divided between 2011 and 2012.

2010 Tax Planning

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Bookkeeping Services 

Tax planning for 2010 may require an understanding of one of the most complicated tax years in recent memory.  This year represents a critical time to ascertain and identify any tax traps while maximizing opportunities for dramatic tax savings. Next year may truly be too late …

 There have been no less than six tax Acts this year, and more changes are anticipated after this election cycle. As always, the key to effective tax planning is to estimate your anticipated income levels not only for 2010 – but also for the next couple of years.

 Although the typical tax planning wisdom has been to avoid paying any taxes for as long as possible, this strategy may have to be dramatically altered. Deductions may be worth a great deal more in a year or two.

 Any tax projections may require you to predict a series of unknown future events, and make educated guesses and reasonable assumptions. Remember, no tax strategy is cast in stone until the time for changing strategies has passed. Tax planning is a dynamic process, and the earlier you start, the better.

 Here are some basic principles that can help guide your overall thinking:

  •  If you expect your tax rate will be higher next year, you may want to accelerate income into this year and defer deductions into next year.
  •  If you think your tax rate might be lower in 2011, consider deferring income to next year and accelerating deductions into this year.
  •  Remember to pay careful attention to your marginal tax rate – the highest rate at which your last, or marginal, dollar of income will be taxed.
  •  Without additional legislation, overall tax rates are scheduled to rise in 2011. However, if your 2011 income will be substantially lower than 2010, your marginal tax rate may decrease.

 We believe proactive tax planning is the key to keeping more of your income.  Proactive tax planning means analyzing your income and expenses for every available deduction, credit, and opportunity, without the need for “aggressive” strategies, “gray areas” or “red flags.”

 We have recently implemented a new tax planning tool, that will help us more than ever before, to identify and explore opportunities with you to cut your tax bill.  Innovative analysis, combined with our years of experience, gives you the proactive advice you need.

 The critical step is to meet with us now, during the 2010 tax year, while there is still plenty of time to consider and implement appropriate planning strategies.

 Our tax planning and coaching services give you a plan for legally beating the IRS.  Please contact uswithin the next couple of weeks todetermine if 2010 tax planning makes sense for you. If you are ready to start planning, please call  to begin.