Perhaps one of the silver linings of 2008 will be that many of us will be able to reduce our taxes this year due to the market decline. Yahoo Finance has made available WSJ’s big questions for your 2008 tax year for us to make sure we squeeze every last ounces of tax deduction! Here’s a summary:
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Sell Some Losers
We all have a ton of these in our investment portfolio I bet. If you have any gains this year, you can sell the losers and offset those gains. Furthermore, you can take an additional $3,000 ($1,500 if you are married and filing separately) and deduct that against your income. Anything more than that amount can be carried over to future years (all the way until death).
If you are considering donating the losers to charity, it’s probably better for you to sell them first. This way, you get the tax benefit and the charity gets the same amount (or even more if you decide to share the tax savings).
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Worthless Stocks Aren’t So Worthless
If you own stock that becomes worthless, remember to claim it as such! Otherwise there’s absolutely no tax benefit. The important point to remember is that you can only make the claim in the same year that the stock becomes worthless. If you find out later, use form 1040X to get it changed.
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Minimum Distributions
Our new president-elect spur up the conversation when he suggested changes in the minimum distribution requirements for retirement accounts after you turn 70 and a half. While the article believes that there could be changes before year end, I doubt it since it’s already December 15! Unlike the article that suggested to wait, I think those that haven’t taken the distribution requirements yet should do so now to avoid forgetting and getting hit with a penalty!
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Gifts from IRAs
I didn’t know that there was a law that allows people over 70 and a half to donate as much as $100,000 a year to charities without taxes. If you qualify, you’d be happy to know that this law has been extended through 2009. Note that this donation also counts towards your minimum distribution so if you don’t need the money, then give it to people that do!
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Charitable Donations for the Rest of Us
The article suggest to try donating with a credit card this year so you can reap the tax benefits this year while pay the amount off next year. I don’t know if I agree with charging credit cards if you aren’t prepared to pay it off right away but if it’s for charity, I will give this one a pass.
- E*Trade IRA - Official Site
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{ 9 comments… read them below or add one }
I’m confused by num 4. I thought I could donate a charity without paying taxes. That’s why I get a tax deduction for donating to a charity. So what does this rule really do? IRA disbursements are taxable, then I give some or all of my disbursement to a charity and get a tax deduction for it. Doesn’t that work even without this rule that has been extended through 2009?
BT: I think the difference is that with an IRA, you can directly transfer the money before it’s taxed straight to the charities. Otherwise, you will have to take the money out, pay taxes, then the givings could be used to deduct taxes. The former works better for keeping your money.
Who put out the recommendation to contribute to charity using a Credit Card, the credit card companies?
Bill: I believe it’s the author of the WSJ article. I know how you feel about the recommendation though. It’s sad that the editor allowed this kind of advice to be published in such an reputable paper.
I honestly think this is one of the more poorly organized tax-roundups I have read. It makes mention of a select few tips, which really do not go a long way toward reducing tax liability. In fact, the tips are rather pedestrian for the Wall Street Journal, as most of the “tips” have been written about by virtually every personal finance blogger already.
I do have to disagree with the condemnation of the paper over the credit card suggestion, even though I think the context of that specific example is dumb. That periodical is not specifically aimed to frugal, or cash-only lifestyle people, and in reality it is a viable tip, if not for the part about not having the cash to do so. Plenty of people do it this way since many credit card issuers provide year-end summaries which makes it easier than hoarding receipts (if you even remember to get one).
Good call – I need to get all my donations out the door ASAP!
Thanks for the tips
As a matter of fact there are several stock strategies that rely on buying stocks which have been oversold from investors taking tax losses..
I have a questions regarding #1. If you have individual stocks that you want to sell, what defines them as “losers”? Just that they are worth less than you bought them for? So if you bought them for 8X but now they are worth 2X, you could sell them and claim a loss of “6X” as long as 6X is $3000 or less? Or is that an additional deduction to the 6X value?
Sorry, I’m quite confused about this! And hopefully my attempt at an explanation is not confusing to you or others. Thanks MoneyNing.
Jules: Let me try to explain. Let’s say you bought 200 shares of Citigroup (C) when it was $30 per share. This cost $6000. Now let’s just say the price per share of C is now $10. This means that the shares are worth $2000 and you (on paper anyway) lost $4000. If you sell 150 shares and get the price of $10 per share, you get $1500 back. However, you used $4500 to buy those shares so you have a $3000 lost. On your tax form (schedule D), record your stock transactions which will reflect this $3000 lost.
The math works out that this $3000 lost will be deducted from your ordinary income so that part of the lost won’t be taxed.
All this assumes that you don’t have any other stock transactions. However, if you do, just sell losers until the tax loss is $3000 more than the gains.
I hope that answers your question and as long as the stock transactions are done that way, just follow the steps on the tax forms and the math will work itself out.