Tax Strategies You Don’t Want to Miss Before the End of the Year

It’s a particularly troubling time for many taxpayers, who are trying to figure out the best strategies like timing earnings, deductions and other maneuvers, amid huge uncertainties about potential tax-law changes. More on that will come to light once the legislative picture is clear.

Until then, here are some thoughts and opportunities to ponder.

Harvest time?

After another year of strong stock-market gains, many investors should consider what may be a “very effective” strategy known as tax-loss harvesting, says Robert S. Keibler, a certified public accountant and partner in Keibler & Associates LLP, a tax. and estate-planning firm in Green Bay, Wis. While it’s more fun to think about your investment winners, set aside time to focus on your losers and consider selling them. While dumping hopeless stocks and other investments at a loss can seem painful, there are many reasons to accept defeat. This long-cherished technique can generate valuable tax savings.

For starters, realized capital losses can usually be used to offset actual capital gains. (“Received” means a loss and gain on securities you actually sold, not a paper profit or loss.) In addition, if your losses are greater than your gains, you will generally lose those net losses each year. You can deduct $3,000 ($1,500 if married and filing separately) from other income, such as wages. And if your net losses are even larger, they are usually carried over to future years. (Check with your state, or tax pro, on potential differences in state-tax laws.)

Caution: Many questions remain about what, if anything, in Congress for proposals calling for higher capital gains taxes for high-income investors. Who will be affected, and by how much and when? These and other questions that may be in the fine print can lead to complicated investment-timing questions for upper-crust taxpayers who can get stuck. Depending on their facts and circumstances, they may need to consult with tax and investment professionals. Stay tuned for further developments.

For those considering this technique, beware of making a “wash sale” and having your loss “disallowed,” as the IRS calls it. A wash sale occurs when you sell or trade a stock or securities at a loss and buy it or “substantially similar,” securities within 30 days before or after the sale, says IRS Publication 550. If you make a wash sale, you cannot deduct the loss (unless it occurred “in the ordinary course of your business as a dealer in stocks or securities.”)

To illustrate an IRS example, suppose you bought 100 shares of a stock several years ago for $1,000. Now, you sell those shares for $750 for a loss of $250. However, within 30 days before or after that sale, you bought 100 shares of the same stock for $800, hoping that the price would rise again. You can’t deduct that $250 loss. Instead, add it to the cost of the new stock ($800), and your basis on the new stock becomes $1,050.

charitable donation

Part of the law that took effect last year creates a new brake for taxpayers who donate to charity and claim the standard deduction, as most do, says Mark Luscombe, chief federal tax analyst at Walters Kluwer Tax & Accounting. We do. For the 2021 tax year, there are some changes, says Eric Smith, a spokesman for the Internal Revenue Service.

• Married couples filing jointly for 2021 can deduct up to $600 of charitable donations if they do not itemize, while the limit is $300 for singles. For 2020, the maximum deduction for joint filers and singles was $300 per return.

• On the 2020 federal income tax return, this deduction was an “above-the-line” deduction, meaning it was recorded above the line for adjusted gross income, or AGI. This lowered the AGI, a number that can affect many other tax items. “Congress wrote the law for 2021 a little differently, making it down the line – not reducing AGI, but reducing taxable income nonetheless,” Mr. Smith says. A draft of IRS Form 1040 for 2021 shows this on line 12-b.

A few reminders on points that haven’t changed: This provision applies to “cash” donations, such as cash, checks, and credit cards. Make sure you have the necessary documents, says Stephen W. DePhillips, owner of DePhillips Financial Group, a money-management and tax firm. Contributions of “non-cash” items, such as clothing or securities, do not count, says Mr. DePhillipes, who is also an enrolled agent, a tax specialist authorized to represent taxpayers at all levels. their’s. Gifts must go to “worthy” charities; Donor-advised funds are not considered eligible for this provision.

In the meantime, a popular provision known as a qualified charitable distribution, or QCD, is alive and well, says Katherine Martin, principal tax research analyst at the Tax Institute at H&R Block. With a QCD, investors age 70½ or older can usually transfer up to $100,000 per year directly from an IRA to charity without taxes on that transfer.

This step, which must be done directly from an IRA to a qualified charity, counts toward the taxpayer’s required minimum distributions for that year. Donations to the donor-advised fund do not count. The IRS says that transfers in excess of the exclusion amount are included in income. See IRS Publication 590-B for more information.