(FORTUNE Magazine) – In 2000 a strange new word entered the vocabulary of a generation of investors: loss. For those whose entire investment experience came during the epochal bull market, it has been a scary detour from what once seemed like a one-way journey into the happy land of double-digit returns.

Of course, as is often said, a loss can mean opportunity. That's certainly the case when it comes to taxes. And with the year nearing its end, now is your last chance to take steps that could dramatically reduce your tax burden come April.

Don't worry. This isn't a crash course on the latest mind-numbing amendments to the tax code. Mercifully, our legislators didn't pass any major tax law changes to make this year's picture any more complicated than it normally would be. However, some provisions that were enacted several years ago will go into effect for the first time in January. So whether you lost money this year or enjoyed a pain-free 2000 of killer returns, there are important surprises in store.

To that end, we've put together what we think will be the definitive investor's tax guide for 2000. What follows are five scenarios that illustrate the situations investors are most likely to find themselves in this fall. From handling investment losses to protecting gains, from making charitable gifts to navigating the dreaded alternative minimum tax, we've outlined challenges and proposed solutions that you can put in place before the band strikes up "Auld Lang Syne."

One final caution: As important as tax planning is, it's always worth remembering that you shouldn't build your investment strategy solely around a desire to avoid taxes. It's better, for example, to pay a slightly higher tax rate on a giant gain than it is to dump a stock you really believe in just to minimize one year's tax bill. (And, hey, don't forget that owing a lot of capital gains taxes means something good happened: You made a lot of money.) Still, whether or not you lost anything to the market, nobody wants to lose even more to the IRS.

GAIN-LOSS PLANNING With the Dow Jones industrial average down 8% this year at press time, the S&P 500 down 4%, and the Nasdaq down 17%, investment losses are about as common as crumpled, discarded betting slips on the floor at a racetrack. Consequently, predicts Joel Isaacson, a New York City financial advisor, "gain-loss planning will be big" this fall.

Tax pros are already hearing from their clients. Bill Geideman, an "enrolled agent," or licensed tax preparer, in Santa Ana, Calif., was contacted recently by a high-tech executive with a six-figure salary who dabbles in the stock market. Last year that client made $100,000 trading mostly tech stocks. This year he hasn't been so lucky in his dabbling--he has lost $50,000. The client wants to know how much, if any, of this he can deduct on his tax return.

The answer: He can use the losses to offset any of this year's capital gains, as well as up to $3,000 of regular income. (Losses from stocks that he held for less than a year get deducted first from short-term capital gains, which are taxed at ordinary income rates; long-term losses are set off first against long-term gains. Either way, what's left can be applied to the other category.) For example, the client could use his $50,000 loss to offset a $20,000 short-term gain and then deduct $3,000 from his regular income. He could then use the remaining $27,000 of losses to offset gains in future tax years. (Losses can be carried forward indefinitely--until death, anyway--but never backward. If, say, you paid a lot of capital gains taxes last year, you can't use this year's losses to claim a retroactive refund for 1999.)

All of this is simple enough if you're planning to liquidate a winning position because you think the stock has risen as far as it's going to go. If that's the case, sell the stock before year's end. The decision, unfortunately, is more complicated if you are considering selling a stock, as investors often do, that is still rising and intend to buy it back later. That can give you both the short-term tax benefit of the sale and the long-term reward of the stock's appreciation.

If you believe the appreciated shares will continue to rise in the future, says Bob Trinz, an editor of RIA's Federal Taxes Weekly Alert, you should consider waiting till 2001 to unload and reacquire them. That will allow you to take advantage of a newly implemented provision known as the "deemed sale and repurchase election." Available in 2001 to those in the 28% tax bracket or higher, this option will permit you to treat a stock as having been sold on a particular day for its fair market value, and reacquired on that day at the same value. The tax result is the same as if you'd actually sold and repurchased the stock; that is, built-in gains are taxed today at current rates. The difference is that the deemed sale and repurchase allows you to avoid the usual transaction costs, including sale and purchase commissions. And since gains from the deemed sale election would be taxed in the 2001 tax year instead of this year, losses recognized this year would need to be carried forward to next year, when they could be used to offset those gains. (Warning: This strategy works well if the shares keep rising. If they fall, you will have effectively paid capital gains on a losing stock.)

Moreover, the deemed sale and repurchase positions you to benefit from another new tax provision: lower long-term capital gains rates for stocks that are held for more than five years. Beginning in 2001, the capital gains rate on stocks held more than five years will drop to 8% from the current 10% for taxpayers in the 15% tax bracket, and to 18% from the current 20% for all other taxpayers. The 8% rate applies regardless of when the stock was purchased; the 18% rate applies only to stock bought after 2000.

Using the deemed sale and repurchase will increase the average price paid for the shares--reducing the future gain and corresponding tax liability. And it will ensure that you pay no more than 18% in capital gains tax if you sell more than five years later. "Presumably, the stock will hold up" until you implement the deemed sale and repurchase, notes Trinz. But, he cautions, "this is a pure tax strategy, and market forces can wreak havoc with it."

One more piece of advice from Geideman: If you had a lot of investment income last year but aren't faring as well this year, there's a good chance that you're overpaying your estimated taxes. Most people simply pay whatever amount they owed the previous year, since doing so insulates them from underpayment penalties. But if you made $50,000 less this year, you actually may owe $14,000 less in taxes, assuming a 28% tax rate. What to do? If the amount of your final estimated payment, due Jan. 15, 2001, is $14,000 or less, just skip it.

EXTRA-CREDIT WORK This year's dismal stock market performance notwithstanding, a lot of investors are holding securities that appreciated greatly over the long bull market. They should consider giving some of those stocks to their college-age children, says CPA Harold Shapiro of Carlin Charron & Rosen in Worcester, Mass. This approach, naturally, is for those who'd rather hand over their cash to their kids than to the government.

As an example, Shapiro points to one client, the owner of a chain of fast-food restaurants, who has a daughter in college and a stock portfolio that has risen smartly. The client earns too much money to make use of the personal dependency exemption, which allows you to cut your income by $2,800 per dependent but which phases out in stages for filers whose taxable incomes are over $193,400, and isn't available at all for those with incomes over $315,900. He also earns too much to make use of the various education tax credits. For instance, the so-called lifetime learning credit, intended to ease the burden on those paying for college, lets people earning less than $80,000 shave $1,000 off their tax bills. But the client's daughter could be eligible for the lifetime learning credit, as long as she earns less than $80,000.

So Shapiro is advising this client to give his daughter some of his appreciated stock now so that she can sell it before the end of the year. She'll owe tax on the gain next April, but as long as her father doesn't claim her as a dependent, she'll get to claim the lifetime learning credit, potentially zeroing out her tax bill.

Say you and your spouse bought stock several years ago for $10,000 and it's now worth $20,000. You transfer the stock to your son, a junior in college, who sells it before the calendar turns over. (Couples can give away up to $20,000 a year to any number of people, gift-tax-free.) Next April he owes tax on the $10,000 gain (since you're transferring both the purchase price and the sale price to him). That would normally mean tax of $1,000, assuming he's in the 10% bracket for long-term capital gains. But now he can take the $1,000 lifetime learning credit, cutting his tax bill to zero. (He doesn't even have to pay his own tuition to claim the credit; tuition you pay for him is attributable to him.) If you and your spouse sold the stock, you'd owe $2,000 in taxes, assuming a 20% capital gains rate. So this maneuver effectively saves the family $2,000.

CHARITABLE GIVING Have you been chewing on the idea of giving money to charity? Now may be a good time. Charitable donations give you the biggest tax benefit--and therefore enable you to do even more good--in years when you earn the most.

Consider: A lawyer has an income that fluctuates wildly, from $100,000 one year to $500,000 the next. He and his wife are also charitably inclined. Last year was a big year for him; he won a few big cases and made $400,000. So Shapiro, the Worcester, Mass., CPA, advised the couple to make a large donation that year via Fidelity's charitable gift fund, one of a handful of so-called donor-advised funds. These allow you to contribute assets (cash or appreciated securities) and take a bigger charitable tax deduction when you need it most, while the charity still receives the same amount in donations over time.

The couple put $20,000 into the fund, which, because they were in the highest tax bracket last year, saved them around $8,000 in taxes ($20,000 x 39.6%). In prior years they'd been in the 28% bracket. Had they given the same $20,000 to charity then--say, $5,000 a year over four years--they would have saved just $1,400 a year in taxes, or a total of $5,600. "The idea is to save more in taxes by maximizing your contributions in years when your income is high," says Shapiro. The beauty of donor-advised funds is that they let you control when you take the deduction.

Note: Donating appreciated stock instead of cash gives you even more bang for your charitable buck. You get a deduction for the full fair market value of the stock, and you escape paying tax on the built-in gains--assuming you held the stock for more than one year. Had you sold the stock and donated the proceeds, you'd owe capital gains tax on the appreciation, shrinking your gift as well as your tax break.

AMT PLANNING Two groups of taxpayers are especially likely to need a last-minute tax tune-up before the year is out: people exercising incentive stock options and people taking big investment gains. Why? "Those are the big-ticket items that push people into the AMT," says Gayllis Ward, head of the tax department at Fiduciary Trust.

The alternative minimum tax, or AMT, was designed to make sure everyone pays his or her fair share of taxes. In essence, it disallows certain deductions and other tax benefits historically enjoyed by fat cats. You calculate your taxes under both systems--regular and AMT--and pay the higher amount. Although this provision was originally aimed at the rich, it is snaring even some regular folks these days because it is not indexed for inflation, and because more people are employing the tax strategies the AMT tries to neutralize.

Take incentive stock options (ISOs), an employee perk being dished out to more and more workers today. No tax is due when you exercise these options, but the "spread" at that point (the difference between what you pay to exercise the options and the market value of the stock) is counted as income for purposes of calculating the AMT. So if you were planning to exercise any ISOs before year-end, you might want to check with an accountant first. He or she can crunch the numbers to see how many ISOs, if any, you could safely exercise without triggering the AMT. (We'd love to tell you how to calculate this yourself, but we can't. The AMT is so complicated and contingent on so many factors that there is no straightforward formula.)

Richard James, director of tax planning for Fleet Bank, outlines a common scenario. A mid-level manager for a FORTUNE 500 company earns $160,000, collects dividends and interest payments of $5,000, and holds a number of ISOs. He is married with grown children, and he itemizes his deductions. According to James, this person could generate $16,000 of spread on his ISOs before he'd get stuck paying the AMT.

People taking big investment gains this year also should beware the AMT. It's not the gains per se that are the problem, explains Ward. It's the fact that unlike the regular tax rules, the AMT rules do not permit deducting state and local taxes (including those on your investment gains).

Ward describes a typical client, a single, retired man with $400,000 of regular income and $1.7 million of realized capital gains from a big, active stock portfolio. This guy won't be able to avoid paying the AMT, so the question is, How can he make the best of it?

One way is to take care not to waste valuable tax deductions. Throughout the year he has been paying estimated state and local taxes of $25,000 per quarter to New York, his state of residence. His final quarterly payment is due in January 2001, plus he'll owe a balance of $30,000 next April. Normally he'd want to accelerate these final payments to December of this year so that he could deduct them on his year 2000 tax return.

However, since he'll owe the AMT, he is advised to make the payments on schedule, in January and April of 2001. That way, he'll still have a shot at using the deductions on his 2001 tax return, provided he doesn't get hit with the AMT again. The deductions can be used only to offset regular income tax. Otherwise, they will be lost forever.

EXERCISING YOUR OPTIONS Sometimes the best actions are the ones not taken, as can be the case with stock options. For example, there are times when the spread from an ISO exercise is so large that it's impossible to avoid being dragged into AMT territory. In that case, says lawyer Andrew Liazos of McDermott Will & Emery, "it may be a mistake to exercise ISOs at year-end." It's often better to exercise them early in the following year.

Here's why. Say a single woman, a tech company executive earning $100,000 a year, exercised one million ISOs for $1 each back in January of this year, when the stock was trading at $5 a share. Assume also that the options were granted to her one year prior and that, in this case, she has no exemptions or other complicating factors. She owed no taxes when she exercised, but the $4 million option spread ($4 a share x 1 million shares) does trigger $1.12 million of AMT ($4 million x 28%, the top AMT rate), which is due in April 2001.

She can't avoid incurring that nasty 28% rate this year, but she can minimize the pain next year. The ISO rules say that if you sell more than one year after you exercise your options and two years after they're granted to you, the proceeds (the market value minus your original exercise price) are taxed as long-term capital gains (20%). So our tech maven can sell her shares early next year to generate cash to cover her 2000 taxes and then pay the lower capital gains rate on her options the year after.

By exercising in January, she started the capital gains clock running in time to cash out at favorable rates before her AMT bill comes due in April 2001. Say she cashes out on March 1, 2001, when the stock is at $10. She'll gross $10 million ($10 x one million shares). That's more than enough to cover the $1.12 million in AMT due the following month. In addition, she'll owe $1.8 million in capital gains taxes due in April 2002 ($10 - $1 = $9; $9 x one million shares = $9 million; $9 million x 20% = $1.8 million).

But equally important, she doesn't have to pay double taxes on the same gain: As long as she doesn't trigger the AMT again next year, she'll get a credit against her 2001 taxes for the $1.12 million AMT incurred in 2000. (This AMT credit can be used only in years when you owe regular taxes, but it can be carried forward. As Liazos puts it, "AMT is often referred to as an interest-free loan to Uncle Sam, as the AMT can be used to offset regular income taxes in the future.") All things being equal, she'll get the credit for her original AMT payment and therefore end up paying a total of about $1.8 million in taxes over two years on her $9 million ISO gain.

Now you're probably wondering, What if you exercise in January and trigger the AMT, and then the stock tanks before the year is over, while you're waiting to cash out? Many dot-commers who exercised ISOs early this year before the spring tech selloff are in just such a position.

If you don't think the stock will rebound before your tax bill comes due--a critical assumption--one option is to dump it this year in what's known as a "disqualifying disposition." This unwinds the AMT, assuming that the stock option gains were what made you liable for the AMT in the first place. All you'll owe come April 15, 2001, is ordinary income tax on the difference between your exercise price and the price of the stock when you sell it. Thus you'll end up paying a higher tax rate but on a much smaller spread.

Say the tech maven in our example exercised her million ISOs for $1 each in January when the stock traded at $5 a share, but by October the stock was down to $1.50. If she sells before year-end she'll wipe out her $1.12 million AMT bill and instead owe just $150,000 of regular tax, assuming a 30% tax rate in round numbers ($1.50 - $1 = $0.50; $0.50 x one million shares = 500,000; $500,000 x 30% = $150,000). Since she'll clear $500,000 from the stock sale in addition to her $100,000 salary, she'll easily be able to cover the tax bill. Sure, she'd rather owe more taxes on a much, much bigger gain. But thanks to this escape hatch, at least she won't be faced with a tax bill that's nearly double her income ($1.12 million vs. $600,000).

Good tax planning can't guarantee you instant riches, but it can help keep you out of the poorhouse.