2009 was undeniably a tough year for many of us–taxpayers, homeowners, and investors alike. So how do you plan your taxes so that your investments and taxes can get off on a good start for 2010?
An important aspect of both investment planning and tax planning is to critically and realistically evaluate your investment performance. Based on your earnings, you can determine how to best plan your investments so that you are not falling behind on your taxes in the upcoming new year.
Read on for the year-end tax planning advice for investors like you:
CCH (http://tax.cchgroup.com) reports:
With 2009 winding down, it is a good time to think about steps you can take with your investments to improve both your financial position and your tax situation for the year. Year-end planning presents an opportunity to recognize gains at low rates or to lower your tax bill by recognizing losses.
Long-term stock gains and qualified cash dividends continue to be taxed at favorable rates of 15 percent. For lower-income investors in the 10 and 15 percent income tax brackets, a zero rate applies to stock gains and dividend income. Long-term capital gains rates apply to stock (and other investments) held for more than one year. Qualified dividend rates apply for stock held more than 60 days of a prescribed period around the dividend’s record date. Short-term gains are taxed at ordinary income rates and apply to stock held for one year or less.
These rates continue through 2010, but with federal tax revenues declining, they may not be extended beyond 2010. If investment considerations justify selling your stock, it may be smart to cash in your gains at these favorable rates in 2009. You may also want to invest in dividend-paying stocks to take advantage of these favorable rates. The lower rates do not apply to interest income.
On the other hand, if your stock has declined in value, it may make sense to sell it and recognize the loss. Capital losses have to be netted against capital gains, but net capital losses can be deducted dollar-for-dollar against ordinary income, up to $3,000 a year. Excess capital losses above $3,000 are carried over to the following year and can be deducted against another $3,000 of ordinary income (after netting with any capital gains in the succeeding year).
If you hold stocks with both gains and losses, you can sell the appreciated stock in 2009, to include the income at low capital gains rates, and then sell the depreciated stock in the following year, when the losses could offset ordinary income taxed at a high rate. Other strategies may apply depending upon the extent of your gains and losses.
If you expect the market to improve, you may want to hold on to your stock, even if it has dropped in value. It may be tempting to sell the stock, to recognize the loss, and then repurchase the same stock. However, the tax code will not let you take the loss if you purchase identical stock within 30 days before or after you sell your shares. So another option is to sell your shares, wait 31 days, and then repurchase the stock.
Another type of investment that some individuals hold is an interest in a passthrough entity, such as a partnership or S corporation. If the entity has losses for 2009, the losses flow through to you, the investor. To ensure that you can deduct the losses fully, you may want to increase the basis of your interest. You can do this by making a capital contribution to the partnership or S corporation. You can also increase your S corporation basis by lending money to the corporation, and can increase your partnership basis by increasing your share of partnership liabilities.
Another consideration is the passive activity rules. If you do not materially participate in the entity’s management, the losses can only be deducted against passive activity gains. You may want to increase your involvement in management so that you can use the losses to offset ordinary income.
If you find yourself in IRS trouble because you owe back taxes, you need to get tax help now before the IRS slams you with severe tax penalties. You can get tax help from a tax attorney or CPA from Tax Resolution Services to settle your IRS debt by calling us today at 1-866-477-7762 for a free tax resolution consultation or visit www.taxresolution.com
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