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End Of The Year Tax Tips
by Tom Barrett
Editor@USInvestorClubs.org
It's Not Too Late to Save on Your Taxes
With the tax cuts of 2001, tax deductions taken this year will probably be worth more than next year. Here are several ideas that could save you some serious tax dollars:
1) Think about any money you may be planning to give to your church or charity any time next year, and give it today! That way you'll get the tax benefits a year sooner.
2) Pay your January mortgage payment early. This will allow you to deduct one extra month's interest deduction in this tax year.
3) These tips will benefit those of you who have made stock market profits this year.
a. Many of you have profits upon which you will unecessarily pay taxes this year. This is because you also have stocks which are at a loss, but which you do not wish to sell ("I KNOW this one will come back!"). Fine. If you believe that, you can have your cake and eat it, too. Sell your stocks which are down before the end of the year in order to reduce your taxes on your profitable trades. Then buy the losing positions back next year (see "Wash Sale" rule below). Obviously you would not want to do this if you have reason to believe your stock will make a big upward move in the next month.
b. The "Wash Sale" rule says you cannot do what I have just advised, unless you WAIT 31 days to re-purchase your stock. The purpose of the rule is to discourage investors from doing exactly what you are going to do, which is to make trading decisions solely to avoid taxes. However, there are many loopholes in this rule. For instance, if you owned the stock and sold it on Dec. 31, you could buy a LEAP on the same stock on Jan. 2. This would be a different security, and therefor not subject to the wash sale rule. Conversely, if you owned a call option on a stock, you could buy the stock itself on the first trading day of the new year quite legally.
c. I do NOT advise actually waiting until the last trading day of the year to do your tax selling. Having managed a large brokerage firm, I can tell you that, contrary to the opinion of many, brokers are human too. In other words, some will take the week between Christmas and New Year's Day off, and the ones who are left will be quite busy with all the people who waited until the last minute. When people are busy, mistakes are made. Try to make your decisions and complete your trading by Dec. 21st.
d. If you invest in index options, be sure to list those separately when you give your accountant a listing of your option trades. All equity options (including ETF's such as the QQQ & the DIA) receive short-term capital gains treatment. However, a quirk in the tax laws gives you partial long-term capital gains treatment (on a 60/40 basis) on investments in index options.
e. This may sound simplistic, but remember that you have not experienced a gain or a loss (and thus no taxable event has occurred)until a trade has been closed. So if a security has lost all its value, you still need documentation of that fact in order to deduct it as a loss, even if your account statement shows its value as zero on Dec. 31. This is because it is not unheard of for valueless stocks to come back to some value at a later time (known in the business as "rising from the dead"!). If the position is an option that has expired, you need no further documentation. However, if a wothless stock still shows on your account statement, you need to ask your broker for a "No Value" letter at the end of the year if you wish to deduct it for 2001. Don't forget that if a miracle occurs, and the stock comes back after you have deducted it, you must report the full amount you sell it for on your next return
4) Those of you who own units in an oil or natural gas exploration program (or are thinking of investing in one before the end of the year) should pay attention to these important tips:
a. Any investment in a domestic drilling program is 100% deductible (with the exception of any minor expense for casing, etc.) against passive or active income, even when you make a profit on the investment. Because the U.S. imports about 60% of its crude oil, the governement is using tax policy to encourage domestic oil production, and the result is some fantastic tax breaks.
b. If you make your investment before the end of this year, even though drilling doesn't commence until 2002, you may deduct it this year, as long as the project begins by March 15 of 2002.
c. If you have oil or natural gas income this year, don't forget to take the energy depletion allowance of up to 24% (the exact percentage is set by the federal government each year depending upon market conditions). This allowance in effect gives you monthly, tax-sheltered income. However, many accountants are not familiar with it, so make sure that your accountant takes advantage of it.
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