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| The Basics | Last chance to save on your taxes
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Capital gains and losses
This year, the stock market has done what I project it will do again: It fluctuated. If you were luckier or smarter than the rest of us, you may have capital gains. If so, remember:
- Any net capital losses over the $3,000 allowed on your 2004 tax return should be carried forward to offset any 2005 gains.
- If you still have net losses, up to $3,000 may be used to offset ordinary income for 2005.
- If you have net long-term capital gains, theyre subject to a maximum 15% rate. If youre in the 15% or lower tax bracket, your tax hit is softened to only 5%.
- If youre single with taxable income of not more than $29,700, you get the 5% rate. With a standard deduction of $5,000 and a $3,200 personal exemption, you can have as much as $37,900 in gross income and still qualify.
- Standard capital-gains planning still applies. If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income.
My general rule is to sell any losers that I wouldnt buy now at todays price. At least then I get to harvest the tax benefit of the loss.
If you have shares of stock pregnant with gains and you dont expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case -- pay the maximum 15% tax. You cant go broke taking profits.
But dont let the tax tail wag the economic dog. In deciding what to keep and sell, consider taxes. But remember, taxes are only one consideration. The final decision should be made on the basis of your growth expectations over your holding horizon.
Enjoy lower rates on dividends
Heres another reason to thank the tax gods. Not long ago, you paid a tax rate of as much as 38.6% on dividends. But now they're treated like capital gains, capped at 5% or 15%.
But theres a tax trap here. Take out your calendar. To qualify for this 15% rate, you must have held the dividend-paying stock for at least 61 days. Heres a wrinkle: Those 61 days must fall between 60 days before and 60 days after the ex-dividend date. (That's the date by which you must own a stock to get the dividend. Check with the company for its ex-dividend date. If you sell shares after the ex-dividend date, you still get the dividends.)
A break for business owners
If you own a business, you can write off up to $105,000 in equipment expenses this year under section 179 of the tax code.
This is the famous provision that allowed you to fully depreciate a vehicle that weighs more than 6,000 pounds that was purchased strictly for business -- such as an SUV or even a Humvee -- in the year you bought it.
Sorry, ancient history! While you can still write off up to $105,000 in equipment expenses, your write-off for an SUV weighing less than 14,000 pounds is limited to $25,000. You only get the old cap if you bought before Oct. 22, 2004, and the vehicle weighed more than 6,000 pounds. (Read more about this here.)
Some breaks to wait for
The Energy Tax Incentives Act of 2005 provides three nice tax credits -- but not until 2006. Next year, homeowners can get credits for installing certain energy-saving fixtures and appliances like energy efficient refrigerators and solar water heaters. The tax break for buying hybrid vehicles will be more attractive next year, too, when current deductions are canceled and replaced with a tax credit of up to $2,000.
A last trick -- and it's legal!
Heres one trick Ill bet you dont know. I call it the Schnepper-Malagoli Charitable Tax Grab. Rent your home to any charitable organization during the year -- up to 14 days total -- and pay zero tax on the rental income. (Internal Revenue Code Section 280A (g), for those of you who feel compelled to look it up.)
Say your church, synagogue or any recognized charity rents your home for a board meeting. They pay you $500. That money is completely tax-free.
Then, without any compulsion or prearrangement, you contribute $600 to this same charity. If youre only in the 25% bracket, you save $150 in tax. The result: With the $500 tax-free rental income, youve got a total of $650 more in your pocket, less the $600 contribution, which gives you a grand total of $50 and your favorite charity $100. One meeting per month (12 is less than 14 days) and youve made $600, while the charity is up $1,200!
Was it intended when Congress drafted the tax code? Clearly, no. Is it completely within the clear wording of the code? Absolutely, yes! Just because its a loophole doesnt mean you cant legally do it. And, theres nothing wrong with doing well while youre doing good.
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