Taxes 
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Job Hunting Costs Are Tax Deductible

Careerbuilder Résumé PaperDid you know that you may be able to deduct the cost of looking for a job from your taxes?

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 Taxes 
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Ten Easy Year-End Tax Tips

Year-End Tax TipsHave you thought about your taxes lately? Probably not, but this month is probably one of the most important months in tax planning because it’s the last time you’ll have an opportunity to effect any meaningful change to your taxes next year. Once December ends, 2008 is essentially frozen and your taxes will be what your taxes will be. So, what sorts of tax moves should you consider making?

Sell your stock losers. Any losses you realize from the stock market, that aren’t offset by gains, can be deducted from your regular income, up to a limit of $3,000 a year. If you’ve been thinking about dumping some losers, now’s the time to do it. If you have more than $3,000 in losses, you can carry those forward indefinitely (until death). More advanced traders may also consider tax loss harvesting as an option as well.

Donate to your favorite charities. Times may be tough but they’re even tougher for charities and philanthropies, who rely on generous contributions to stay in operation. Consider donating money, goods, clothes, your car, anything – to one of your favorite charities so that they can stay operating through these difficult economic times. If you itemize your deductions, you can deduct contributions from your regular income.

Delay bonuses and income. If you can swing it, try to push any additional payments until the new year. If you are paid this year, you have to pay taxes on it in a few months. If you are paid next year, you won’t have to pay taxes on it for an extra year. If your employer withholds taxes on your bonus payments, this is a less valuable strategy. :)

Prepay state and local taxes. This one is a little tricky, if you don’t think you’ll be subject to the AMT, consider prepaying your state and local taxes. State and local taxes are federal tax deductions so prepaying them today means you can deduct them today as well.

Accelerate other deductible expenses. If you have a mortgage, consider paying next month’s payment this month. If you pay it this month, you can deduct the interest payment against this year’s income. If you pay for it on January 1st, it’ll have to wait until you file 2009 taxes. This is true of any deductible expenses you may have from student loan debt to medical to your real estate taxes. If you want, you can make the payment with a credit card and then pay off the credit card next month and still have it be deductible for 2008.

Use up your $12,000 gift exclusion. Each year, you are allowed to give $12,000 to someone else tax-free. If you give more than $12,000, then you are subject to what is known as the gift tax. It’s a little backward but it’s a page out of the estate planning book since heirs to an estate are often taxed on that estate. Anyway, if you were planning on giving someone a very generous gift, don’t forget to to do it. Next year the limit rises to $13,000 so you can give $25,000 to someone within a week and avoid the gift tax ($12,000 on December 31st, $13,000 on January 1st). If you are married, you could give someone $50,000 ($25,000 from each spouse).

Beware buying into mutual funds with capital gains distributions. Mutual funds buy and sell stuff all year, then distribute a bit of that at the end of the year. What you won’t want to do is buy into a mutual fund that is set to make a year-end capital gains distribution because you’ll be immediately taxed on that distribution. Imagine a mutual fund that costs $100 a share. You buy it and the next day it makes a $1 per share distribution, lowering the cost per share to $99. You just bought the thing and already are on the hook for $1 per share in taxes. Boo!

Contribute to your retirement. If you aren’t maxed out on your 401(k), or similar, plan, consider doing it because each dollar contributed is entirely deductible. The 2008 contribution limit for your 401(k) is $15,500 ($20,500 if you’re 50 or greater). Another good idea is to contribute towards your IRAs but you have until April 15th to accomplish that.

Get married. Your tax filing status is based on your status as of December 31st, 11:59 PM. If you were married on December 31st, you’re considered married for the year. If that helps your tax situation, you might want to consider it. :)

Get everything ready. If you’re due a refund, try to get all your ducks in a row as soon as possible so the government will mail you your refund check ASAP. All you’re really waiting for is the official W-2 from your employer, which they are required to mail out by January 31st, and you should be ready to hit the e-file button.

(Photo: thetruthabout)


 Taxes 
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Tax Loss Harvesting

Tax Loss HarvestingHas the stock market decimated your portfolio too? Yeah, us too. Fortunately, there’s something called tax loss harvesting and it can help anyone get a little edge on the recovery. The idea behind tax loss harvesting is that you sell a particular holding, take the capital loss, and then immediately invest it in something similar but not the same as the original holding. By doing this, you “harvest” some of your losses to offset gains or ordinary income, and by investing in a similar but not a “substantially identical security,” you also benefit from the recovery. The key in this strategy is that you invest the tax savings, from the loss, back with the original sum.

Some words of advice on tax loss harvesting:

  • The reason why you can’t by something “substantially identical” has to do with the wash sale rule. If you want to deduct the loss, you have to follow wash sale rules.
  • Don’t do this in a retirement account. There is no capital gains or losses tax in retirement accounts. 401(k)’s and IRAs appreciate without taxes and taxes are only assessed at distribution time (with the exception of Roth IRAs, which are never taxed).
  • Substantially identical is a gray area because the IRS hasn’t clearly defined it but make sure it passes the sniff test. One interesting thing of note is this explanation on IRS Publication 564: “Substantially identical. In determining whether the shares are substantially identical, you must consider all the facts and circumstances. Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.” The key word there is ordinarily. Just pass the sniff test, I’m sure your nose works well. :)
  • If your capital losses exceed your gains, you can deduct $3,000 of capital losses against your ordinary income. If your losses exceed that, you can carry those losses forward each year without limit.
  • You don’t have to wait until the end of the year to do this, in fact it’s probably better to give yourself the flexibility of doing this earlier in the year because of wash sale rules.

Why Tax Loss Harvesting Works

Let’s consider the scenario where a fund has dropped 10%, the investor opts to harvest losses and immediately invests in a fund that closely mimics the original fund. Both the original fund and the new fund appreciate by 11.1%. The investor invested $10,000 and is in the 25% tax bracket. Who wins?

Does not tax loss harvest: This scenario is simple, the investor has effectively had no change because the original fund has return to its original value. He sells and has no capital gains or losses.
Does tax loss harvest: The fund fell in value from $10,000 to $9,000 and the investor does some tax loss harvesting to extract the $1,000 in loss. The $1,000, come tax time, will yield him $250 in tax savings. He reinvests the $9,250 into a similar but not “substantially similar” fund and it appreciates by 11.1% to $10,276.75. When he sells, he pays taxes on $1026.75 of capital gains – or $256.69. Subtract that from his $10,276.75 and he’s left with $10,020.06, which is $20.06 ahead of what he had if he hadn’t harvested losses.

Tax Loss Harvesting with Placeholders

Let’s say that you really like a particular mutual fund, your brokerage doesn’t offer anything similar, and you aren’t about to open up another account at another brokerage just to do this tax loss harvest. A potential option is to use exchange traded funds (ETFs) as a placeholder for the wash rule period. Sell your loss, buy into an ETF, wait 31 days, then sell the ETF and get back into your fund. By selecting a similar ETF, you can catch any rises in the industry without sitting on the sidelines.

Please consult with an accountant to clarify your particular situation before doing anything I’ve talked about here.

(Photo: tonivc)


 Taxes 
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$3,000 Capital Loss Deduction

At the end of last year I wrote a few articles about stocks and taxes, the most important of which was the concept of deducting capital losses against capital gains. One sentence in the article talked about when you have an excess of capital losses, an idea I wanted to expand upon given the recent blood letting in the capital markets. Given the combination of a slowing economy and some unrealized losses sitting on the books, consumers might want to realize the loss and take the $3,000 deduction from their regular income.

For example, if I bought $10,000 of stock in Company ABC and that stock was now worth $7,000 – I would be realizing a $3,000 loss. I record the loss on my tax return (Form 1040, Schedule D) and then transfer it to my regular form to deduct from my income. That limit is reduced to $1,500 for those married filing separately. If your losses exceed $3,000, then you can keep carrying that over year to year indefinitely.

Why would you want to do this? Your tax refund will be larger because you’ve reduced your income by $3,000. If you’re in the 25% tax bracket, your tax return would increase by $750. You’ve already lost the money, you simply haven’t realized it yet. :)

Why WOULDN’T you want to do this? The wash rule states that you can’t claim a capital loss if you buy back into the investment within 30 days. You can buy back in after the 31st day but anytime before that and you’ve realized a loss without the tax deduction.

It’s neither a smart move or a dumb move, just a move that is made smart or dumb based on your situation.


 Personal Finance 
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Money Tiers: Learn Them To Save Money

In mathematics, there’s a concept known as a step-wise function. Its namesake is owed to what the function looks like when you graph it, it looks like steps or stairs (this is sort of what it looks like).

Example Stepwise Function

As you slide across the X-axis, the Y doesn’t jump up until after a certain amount. It’s at those boundaries, where the tiers shift up (or down), that you need to pay the most attention. Why is this little trip down memory lane important? Many things in personal finance are step-wise functions and it’s important to understand them because it can save you a lot of money.

When I discussed the impact of your credit score on your loan interest rates, I listed a table of scores and rates. If you remember the chart, everyone with a credit score between 760 and 850 would paid an interest rate of 5.766% on a 30 year fixed loan. Someone with a credit score of 759, just a sniff away from 760, would have to pay 5.988% – or 0.222%. One hard inquiry can shift you from one category to another and cost you a few thousand dollars. That one inquiry can take you from step to another and cost you thousands of dollars.

What other personal finance “functions” are tiers?
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 Taxes 
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2009 Federal Income Tax Brackets (Official IRS Tax Rates)

9/16/09: The inflation data for 2009 have been released, so you can find the 2010 income tax brackets.

2/26/09: These IRS tax brackets are official.

The Labor Department released inflation data yesterday and the Wall Street Journal had three tax experts estimate how all the inflation-pegged tax figures would change based on those numbers. Many tax numbers, like the brackets, exemptions, standard deductions, etc., are pegged to inflation so knowing the Labor Department figures can give you huge insight into how those numbers will move. The three experts are George Jones, senior federal tax analyst at CCH; William Massey, senior tax analyst for the tax & accounting business of Thomson Reuters; and Prof. James C. Young, professor of accountancy at Northern Illinois University. The Wall Street Journal does this every year and, for as long as I can remember, they’re often it pretty spot on. Based on their calculations, a bunch of inflation-pegged tax numbers are going up.

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 Taxes 
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Slight Misunderstanding of Marginal Tax Brackets

Reader Ann asked the following question on my post about the 2008 Federal Income Tax Brackets:

Jim ~

My husband has just been offered a salaried position of which he is excited yet somewhat reluctant about. The increase in salary would put us “over the edge,” so to speak, into the 25% tax bracket. His position probably doesn’t have much more room for increased income. We are not currently in a position to owe significantly more tax. In addition, we are quickly loosing our child deduction as they are becoming “independent.” Advice?

Here was my reply:

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 Taxes 
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5 Reasons You Should Donate Your Car

Donate Your Car - Free Towing!If you’ve bought yourself a new car and are looking to get rid of your old one, or simply want to get rid of a car, consider donating it to an organization that accepts car donations. Selling the car will almost always be better than donating from a financial standpoint, but donating offers benefits that may trump the money depending on your situation. After detailing five reasons why you should donate your car, I’ll give a few scenarios where donating is better than selling.

Here are five solid reasons why you should donate your car:

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