already over, the 7.5% threshold, you can incur discretionary medical expenses-dental work or eye exams, for example-because they’ll be deductible.
Similarly, miscellaneous itemized deductions (such as tax preparation and investment-related expenses) can be written off only to the extent that they exceed 2% of your AGI. If you’re over the threshold for this year, you might as well write checks for professional and investment-related publications (such as black enterprise). Those expenses will be deductible.
GAIN BY LOSING
Your portfolio offers year-end tax-planning opportunities, too. If you end up with year-end net capital gains, you’ll owe taxes come April 15. With a little maneuvering you can transform that obligation into tax savings. Suppose you have a $10,000 net profit for securities transactions for 2000. You’ll likely owe $2,000 in federal income tax, at a 20% long-term capital gains rate.
Rather than accept this situation you can go through your portfolio in search of losers and sell enough stocks, bonds, and mutual funds to realize $13,000 worth of losses. This will give you a $3,000 net loss, which is fully deductible from your other income.
“A $3,000 net capital loss is the largest amount you can deduct,” says George Stewart, a CPA in Seattle. “Net losses in excess of $3,000 may be deducted in future years, as long as you keep good records.”
Patricia Coleman, a Microsoft-certified systems engineer who works as a consultant in Microsoft’s Pacific Northwest territories, is looking to sell some of her investments. “I exercised some stock options earlier this year,” she explains. “I paid $14 per share and I exercised the options when the stock was around $109, so I picked up a considerable amount of extra income for 2000.” In most situations, when an employee exercises stock options, the difference between the price paid and the current market price is treated as taxable income.
What if you think your losers still have potential? “You can wait at least 31 days and buy them back,” says Stewart. “If you act sooner, the tax loss won’t be allowed. Alternatively, you can immediately buy back securities that are similar but not identical.” If you’ve taken a loss on a dotcom stock, for example, you can immediately buy another dotcom stock without losing your tax deduction.
If you invest in mutual funds, you may not know your exact gain or loss position until December, when most funds make capital gains distributions. These gains are taxable income, whether or not they’re reinvested. Therefore, you should get your other records in order so that you can act immediately after you’re notified of your distributions for 2000.
If you still like the stocks or fund that you sell, you can buy them back right away without triggering a tax bill. This maneuver will raise your “basis” in the securities, so you’ll owe less tax when you eventually unload.
Your year-end tax planning thoughts may turn toward charitable contributions. These include items given to charity: used furniture, electronic goods, a car, or even appreciated securities.
“A donation of appreciated securities offers greater tax