the tax loss and then give away cash to your children, if desired.
There is one situation, though, in which you might give appreciated shares to your children. Suppose, for example, you have children in college or almost there; you intend to sell appreciated stocks or mutual fund shares to pay for their education. In that case, you can give away those securities to your kids, using the $10,000 annual gift-tax exclusion. (Married couples have a $20,000 annual exclusion.) Then your children can sell the shares and, assuming they’re in a low tax bracket, pay tax at a 10% capital gains rate rather than a 20% capital gains rate.
FOR EMPLOYEES AND EMPLOYERS
If you participate in your employer’s flexible spending account or cafeteria plan, be sure you use up all of the money in your account by December 31. Buy eyeglasses or see your dentist, for example, if you’re in a medical reimbursement plan. Unused amounts are returned to your employer, so you’re losing money you’ve earned. If you had to struggle to spend it all this year, consider a smaller allocation for 2001.
Similarly, this is a good time to review your 401(k) or other salary deferral plan. “Try to maximize this year’s contributions and decide how much you can afford to defer next year,” says Stewart. “At the very least, defer enough salary to get the largest possible employer match.”
If you have stock options that expire at year-end, you’ll want to exercise them if they have some value. Even if your options don’t expire, you might want to exercise some this year. But you should check first with your tax professional so you’ll know the consequences. “If you exercise all of your options at once,” says Stewart, “the extra income may put you in a high bracket that year. Therefore, you may be better off staggering the exercise of your options over a period of years.”
Business owners enjoy additional opportunities for year-end tax reductions. For example, you probably can take advantage of the “expensing” election permitted under Section 179 of the tax code and claim a full first-year write-off for equipment you buy. “In 2000, you can expense up to $20,000 worth of business property,” says James Piazza, tax partner in the Roseland, New Jersey, office of the accounting firm Arthur Andersen L.L.P. “The $20,000 limit applies to taxpayers who purchase no more than $200,000 worth of equipment per year.”
If you run a business on the side or do some freelancing, you can take advantage of expensing, too. Thus, this may be the time to buy a new computer and phone system. “For equipment to be expensed in 2000, it must be placed in service this year, no matter when you pay for it,” says Piazza. If you place equipment in service in December, and your obligation to buy is solid, you can qualify for a 2000 write-off even if you don’t pay until January 2001.
Strategic Marketing Resources, for example, is considering the purchase of mail-processing equipment as well as