4 More Smart Tax Moves for the Holiday Season
1. Go to the Doctor
Spend all the money in your health savings and dependent care accounts before the end of the year. If you don’t use the HSA balance, you lose it, and money left in a dependent care account gets added back to your taxable income, says Mark Steber, chief tax officer with Jackson Hewitt Tax Service.
Health savings accounts allow you to avoid federal income tax by earmarking in advance up to $3,050 for singles or $6,150 for families for medical expenses, according to HSA for America. Pre-tax money goes into the account, and interest on it accrues tax-free. Another benefit of medical health savings accounts: portability. Your account goes where you go — which is no small matter in this economy.
Among the many things you can spend HSA money on: dental work, eyeglasses, hearing aids, contact lenses, over-the-counter drugs and visits to the chiropractor. Long-term care premiums can also be paid for from an HSA, up to $260 for those under age 40, $490 if you’re between 41 and 50 years, and up to $2,600 if you’re 61 years or older, according to HSA for America.
2. Take Income Later, Deductions Now
Postponing income is a smart strategy when your financial situation is changing and you know your tax bracket will be lower next year, says CPA Gail Rosen. So if you’re lucky enough to be getting a bonus this year, consider deferring it until 2012, if your boss is willing. Or, if you own a business, hold off on billing customers until after Dec. 31. And wait to sell any stocks or investments that will hit you with capital gains until the new year.
It could be too, that accelerating deductions into 2011 would work in your favor. If you expect to be in a higher bracket next year, figure out if you can pay certain bills early to allow you to claim larger deductions now. Also, consider if items like the child tax credit, higher education tax credit, the above-the-line deduction for higher-education expenses or deductions for student loan interest would be phased out at your higher 2012 income level, says Rosen.
If you make your January 2012 mortgage payment early, you can get the deduction for it in 2011. See if you can pay any property taxes early as well. If necessary, use your credit card to prepay 2012 expenses to capture the expense in 2011, recommends Rosen.
She offers a strategy for state taxes too. “If you won’t be subject to the Alternative Minimum Tax, and if you generally owe state and local income tax, consider increasing your withholding taxes, or making your estimated payment by Dec. 31 to get this deduction this year.”
3. Don’t Rush to Sell that Losing Investment
At the end of the year, investors who have realized capital gains typically look to sell losing positions to offset them. This year, your thought process may need to be different. If you’re in the 15% tax bracket (up to $69,000 of taxable income for married couples, and up to $34,500 for singles) your long-term capital gains included in that amount are taxed at 0%. “So think twice about selling a losing position just for the purpose of offsetting gains,” says Joseph Arena, director of tax and business services for Brighton Securities. “Unless you have a sound investment reason to sell the losing position you will be losing the tax benefit of the capital loss. You can’t reduce a 0% tax bite!”
But if you do decide to sell a losing position, be mindful of capital gains distributions from mutual funds. “Equity markets have been volatile recently, which may lead to above-average trading activity and larger-than-expected capital gains distributions,’ points out Joe Jennings, director of investments at PNC Wealth Management. “Most funds release estimated gains distributions in November or December, which provides ample time for investors to harvest losses, if possible.”
4. Pull a Switcheroo — or Two!
If your traditional IRA is at a low market value, and you plan to hold that investment for a long time, converting it to a Roth IRA may be a good strategy. Remember though, that the conversion will increase your 2011 adjusted gross income.
Or, reverse your Roth IRA conversion: If you converted into a Roth IRA from a traditional IRA last year, and if the value of your account has declined, you may want to switch back — temporarily.
For example, she says: If in 2010, your IRA was worth $100,000 when you converted to a Roth IRA, then you paid tax on $100,000 in 2010. But if the Roth IRA is now worth just $80,000, undo the conversion with your broker and file an amended return for 2010 for the $100,000. Then, pull a double-reverse and reconvert it to a Roth in 2011, and you’ll only pay tax on $80,000 — saving you taxes on $20,000.