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Personal Finance > Taxes
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Taxes: 7 do's and don'ts
graphic December 6, 2001: 4:32 p.m. ET

A little planning now could save you a lot on your tax bill come April 15.
By Sarah Max
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  • The pros and cons of 529s - Oct. 15, 2001
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    NEW YORK (CNN/Money) - Before you deck the halls with holly or draft next year's list of resolutions, you might want to pencil in some time for a bit of year-end tax planning. The decisions you make in the next few weeks could have significant tax implications, for better or for worse.

    Do: Match portfolio gains with losses

    You should never let tax considerations dictate your investment decisions, but if you're on the fence about selling a loser stock, consider doing it before the end of the year to offset realized capital gains. If you sold a long-term holding for a $10,000 profit, for example, you'll likely pay $2,000 in taxes. Match that gain with a $5,000 loss, however, and you'll owe half as much. "If you have more losses than gains, you can deduct up to $3,000 this year and carry the balance to next year's deductions," said Harvey Berger, a tax partner with the accounting firm Grant Thornton.

    One word of caution: If you sell a stock for the loss but buy it again within 30 days, you run into the "wash sale rule," which will prohibit you from deducting that loss.

    Don't: Buy mutual fund shares before distribution

    Every year, usually in December, fund companies distribute dividend income and capital gains to their shareholders who in turn pay taxes on them. Because these taxes are based on the number of shares you own, not how long you've owned them, you could end up paying taxes on shares you bought only a week prior to the distribution.

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    "If you're thinking of buying into a fund, make sure you don't get in right before the distribution," said Mark Luscombe, principal analyst for the tax publisher CCH.

    Do: Consider selling underwater options

    You might not be getting rich off stock options this year, but you could still be paying taxes on them. If you exercised an incentive option from your company this year but have not sold the stock, you'll owe taxes on the difference between the exercise price and the fair market value of the stock at that time. "If the price of the stock drops, you could owe more in taxes than the value of the stock," said John Battaglia, tax director for Deloitte & Touche's private client advisors group. How do you free yourself of the tax? If you sell the stock you'll only pay capital gains on the difference between the exercise price and the current price. If your exercise price is higher than your sell price, which is quite possible these days, you can even deduct part of the loss.

    Do: Pay your estimated taxes

    The IRS requires everyone to pay quarterly estimated taxes that add up to at least 100 percent of what you paid last year and 90 percent of what you will owe for this year. If you don't pay these dues, you face a 7-percent penalty on what you owe until it's paid. Most employees don't need to worry about underpaying, since companies withhold taxes from their checks and pay these estimates for them. But people who are self-employed or have significant income in addition to their salary will want to make sure they've sent the IRS its share before the end of the year.

    If it's possible to shift some of this year's income to next year (i.e. opt to take your bonus or severance package in January) you could benefit from the Tax Relief Act, which will shave about half a percentage point off your income tax rate.

    Do: Drain your flexible spending account

    By putting money in a flexible spending account, you can get tax-free savings for out-of-pocket medical expenses. Problem is, these accounts are subject to the "use it or lose it" rule, which means the money does not roll over from one year to the next. Most companies give employees some time after the New Year to submit receipts, as long as the expenses were accrued this year. If you haven't been saving all of your receipts, you might want to go shopping for new eyeglasses or make an appointment to get your teeth bleached before the end of the year.

    Do: Delay 529 withdrawals until next year

    If you're ready to tap your 529 college savings plan to help pay for tuition, you might consider waiting for the calendar to flip.  As of January 2002, all distributions from 529 plans are exempt from federal taxes if used for qualified educational expenses. Until that time, earnings will be taxed at the child's tax rate of 15 percent.

    Click here to read the pros and cons of 529s

    Do: Think twice before you tie the knot

    If you're thinking of eloping over the holidays, you may want to consider the tax consequences of ending 2001 as a couple (romantic, isn't it). Although some accountants will tell you that the IRS doesn't keep track of your exact marriage date, technically you are required to file a joint return for this year. For some couples, particularly those with big differences in their income, filing jointly can be advantageous. If a husband and wife each make a lot of money, however, they are apt to pay more in taxes than they would on their own. "If both people make $300,000, they'll pay more than $18,000 in taxes by filing jointly," said Deloitte Touche's John Battaglia. "That's about the cost of the wedding." graphic

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    The pros and cons of 529s - Oct. 15, 2001





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    Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
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