(FORTUNE Magazine) – Every December you hear the same message: It's time to get your financial house in order, to start thinking about taxes, to start selling investments (or conversely to not even think about selling them), blah blah blah. No wonder you tend to tune out such admonishments, especially when you strongly suspect they involve sitting down with a pencil and notepad, and you'd rather be hoisting a holiday martini.

But believe us when we tell you that this year is special. Really. The Economic Growth and Tax Relief Reconciliation Act of 2001 comes at the very time that many of us are facing sickening losses in our stock portfolios. Those two factors--a new tax landscape and an unusual investment situation--mean that some of the old rules no longer apply. And the moves you make in the next couple of weeks could either save you a bundle or nail you for thousands of dollars.

Got that pencil? We'll review the basics and highlight the news on what you can do right now to make this year's losses less painful--and to ensure that you get to keep more of what you make next year.

UNLOAD YOUR LOUSY STOCKS

In a year as gut-wrenching as this one--even with the November rally, the S&P is down 13%, the Nasdaq off by nearly a quarter--people did some mighty strange things (which seemed perfectly rational at the time). Maybe you doubled up on shares of EMC after the first of its many 50% nosedives. Or you snapped up some more Enron after it temporarily shot up in October. Oh, the pain of it all.

We have three little words for you: tax-loss selling. If you dump your dogs by Dec. 31, you can use the resulting losses to offset any capital gains you realize this year. When you have more losers than winners, you can apply up to $3,000 of the excess losses to reduce your ordinary income. What if your losses stretch far beyond your gains? The beauty of capital losses is that you can carry them forward indefinitely, or at least until you die, for use against future capital gains. If your losses are big enough, you may never have to pay capital-gains tax again! So if you think your stock's down for the count, sell it now. Repeat: Sell it now. Tax considerations aside, it's just plain stupid to cling to a loser stock when you could put your money to much better use elsewhere.

Harvesting losses also gives you a perfect chance to reallocate your investment portfolio. "Before this year, people didn't want to reallocate because they were afraid of triggering capital gains," says Tom Pudner, a tax specialist at accounting firm KPMG. "Now's a great time to do it." If you've become overweighted in certain sectors, keep your overall portfolio goals in mind as you sell.

HEDGE YOUR BETS

It's relatively easy to unload stocks that you know are dead in the water. But the decision to sell a stock that's gone down becomes a bit trickier if you think there's a chance it may rebound. One solution: Sell the stock now in order to lock in the capital loss, and buy it back after 30 days have passed. You must wait at least that long, or the IRS will not allow you to claim the loss this year under its so-called wash-sale rule. Worried about the stock's zooming up before the waiting period is over? Hedge your bets by buying a similar stock or a sector-specific mutual fund that holds the stock. If you're selling Merck, for instance, you might want to buy Eli Lilly or a health-care fund as a short-term replacement.

Another reason not to worry much about selling now: Even if you experience such profound remorse that you wind up buying the stock back before the wash-sale period is over, you'll still be able to use your loss; you just won't be able to apply it against your 2001 taxes. "The wash-sale rule defers the loss; it doesn't eliminate it," notes Don Weigandt, a tax specialist at J.P. Morgan's private bank. Say you originally bought Nortel at $80 a share. Now that it has plunged to $8, you've decided to sell the stock and apply the $72-a-share loss against your 2001 capital gains. Fast-forward to a week later: You regret the decision and decide to buy the stock back at $9. You can no longer apply the loss against your 2001 capital gains. But the loss will be added to the cost basis of the new shares you just bought--in effect, you've just paid $81 for those new shares as far as the IRS is concerned. When you eventually sell your Nortel position, you'll generate a smaller gain or a larger loss.

MANAGE YOUR GAINS SMARTLY

If you happen to belong to that exclusive club of investors who had more winners than losers this year--and we tip our hat to you if you do--you have to plan your selling maneuvers just as carefully. Investors who hold a winning stock for more than a year will be taxed at the long-term capital-gains rate of 20%. But those who've owned the stock for less than a year will have their gains taxed as ordinary income, meaning they could pay almost twice as much tax in the top bracket. Close to the one-year mark? Consider hanging on until then--but only, of course, if you think the fundamentals justify the stock's holding up that long. If not, bail out; a taxable gain always beats a loss. A reminder: When you want to sell only a portion of your holdings rather than the whole shebang, make sure you instruct your broker in writing to sell your highest-cost shares first. That way you'll minimize your gain for tax purposes, or maximize your loss if you have one.

If you're planning to sell a mutual fund, be sure to do so before the fund makes its annual capital-gains distribution. That usually occurs in December, but you should call the fund to determine the exact date. Assuming you've held the fund for more than a year, you'll pay tax at the 20% capital-gains rate when you sell it. But a good chunk of the distribution, if you receive it, will probably be taxed at your ordinary income rate--which could be as high as 39.1%. By the same token, put off investing in new fund shares until after the distribution date.

SUSS OUT YOUR AMT RISK

You don't know whether to laugh or cry. On the one hand, the new tax law brought down marginal federal tax rates across the board by half a percentage point in 2001, another half in 2002, and so on. That's a good thing, right? Not necessarily, because those very rate cuts are going to propel millions of unwitting taxpayers into the dreaded alternative minimum tax zone over the next few years, many for the first time.

If you've never been zapped by the AMT, here's a primer. The AMT is a parallel system of taxation designed to prevent wealthy individuals from taking too many deductions. To figure your tax for the year, you calculate your taxes under both systems--regular and AMT--and pay the higher amount. The actual AMT rate is lower than the top regular federal bracket of 39.1%: 26% on your first $175,000 of taxable income and 28% above that. But the AMT rate is applied to a much higher income base because a slew of standard deductions, like state income taxes and personal exemptions, don't apply. So at the end of the day, the AMT tax can be much higher than what you'd otherwise owe.

As regular tax brackets drift lower and lower and the AMT rate remains the same, more and more upper-middle-income folks will get hit. The federal government estimates that 1.4 million taxpayers will owe the AMT in 2001, compared with 132,000 in 1990. In 2002 that number is expected to rise to 2.7 million; by 2010, to 35.5 million. According to Glenn Hascher, a partner at Ernst & Young, you're at risk if your income is above $75,000 and any of the following factors apply: You have significant write-offs for personal exemptions, you pay high state and local income and property taxes, your capital gains are significant, or you exercised incentive stock options this year.

But the only way to tell for sure whether the AMT is likely to snag you is to do some complicated calculations. So if you're worried, visit your tax preparer. Not in April. Not in six weeks. Now. If you don't, you could find yourself paying thousands of dollars in unnecessary taxes--all by doing things that make perfect sense under the regular tax system but could pummel you if you fall under the AMT. For instance, conventional wisdom dictates that with tax rates coming down next year, you should defer as much income as possible into 2002. Likewise, you should accelerate as many deductions as possible into 2001, when they'll be worth more. But if you happen to fall under the AMT this year, you'd actually be far better off doing the opposite. You should save your valuable deductions for next year, when you can use them (you hope) and pull as much income as you can into 2001. Which brings us to our next tip:

PUSH AND PULL

Not at risk for the AMT in 2001? Pull as many deductions as possible into this calendar year. For instance, pay state and local property taxes due in early January this month. Ditto for your January mortgage payment. If you have unreimbursed medical and dental expenses, which you can deduct only if they exceed 7.5% of your adjusted gross income, try to bunch your payments into one year as opposed to spreading them over a couple of years. The same goes for miscellaneous deductions, which must exceed 2% of your adjusted gross income. So prepay such expenses as tax preparation and investment advisory fees, safe-deposit charges, and subscriptions to professional journals.

Push that income too, assuming you're not subject to the AMT this year. If you're self-employed, you can do that by waiting to bill your customers until next year. If you work for someone else and are eligible for a bonus, ask your boss to defer payment until the new year.

BE SAVVY ABOUT OPTIONS

So you've been granted incentive stock options from your employer that you're itching to exercise. Consider delaying until 2002. Even though you'll owe no taxes when you exercise (assuming you hang on to the shares rather than selling them immediately), the AMT can get you again here: In the unforgiving realm of alternative minimum taxes, the spread between the price you pay to exercise the options and the market value of the stock on the exercise date is considered income--whether you ever see that money or not. For instance, say you exercised 1,000 options for $50 a share when the market price was $60. That $10,000 spread would be poured into the AMT cauldron.

For those still clinging to shares that have sunk well below the strike price, tax rules offer only modest hope: Hold on to the stock for a year or more after you exercise the options, and the proceeds from any sale will be taxed at the long-term capital-gains rate of 20%. (Otherwise, ordinary income rates apply, and they could be twice as high.) Take the example above, and say the stock is now trading at $20. You're still in AMT territory. But sell the stock before the one-year period is up, and the exercise spread won't be added to your AMT calculation after all, just as if it had never happened. KPMG's Pudner says that strategy may be worth pursuing if you're close to the AMT threshold and you don't think the stock will recover anytime soon. What's more, if the stock has tanked enough--yes, we're looking for silver linings here--you won't owe any taxes on the sale, but you'll realize a capital loss that could offset other gains down the line. In the above example, for instance, the loss would be $30,000 ($20 minus $50, times 1,000 shares).

MILK PERKS TO THE MAX

The new tax law will allow you to sock away more money than ever in your employer's tax-advantaged retirement savings plans. In 2002 you'll be able to set aside up to $11,000 in your company's 401(k) plan, up from $10,500 this year. If you're over 50, the news is even better: You can contribute up to $12,000 next year under the government's retirement "catch-up" plan for older workers. (Contribution limits for both traditional and Roth IRAs are increasing too, to $3,000 in 2002--$3,500 for those over 50.) So call your company benefits office before the end of the year and up your contribution.

Earn more than $85,000 a year? You may be eligible for a deferred-compensation plan. Almost 90% of Fortune 1,000 companies offer such plans to management-level employees, according to compensation firm Clark/Bardes Consulting. Like 401(k) plans, deferred-compensation plans allow you to make pretax contributions that grow tax-free until you take them out. But you can usually contribute much more--sometimes up to 100% of your compensation. And you can typically take the money out without penalty at any age, as long as you stipulate beforehand when you want the withdrawal to take place. One caveat: While the plans can offer a tremendous opportunity to accumulate significant wealth over time, they aren't like 401(k) plans, which guarantee the safety of employee contributions. "The real risk you run is that your company becomes bankrupt and you become an unsecured creditor," says New York City financial planner Gary Schatsky.

Also, don't forget to fund any flexible-spending accounts (FSAs) your company offers. These plans deduct money from your paycheck on a pretax basis to pay for such things as child care, elder care, transportation costs, and health-care expenses not covered by insurance. Because you're paying with pretax dollars, you'll be saving as much as 39% on those items, depending on your bracket. There's only one catch: You forfeit any money left over in your FSAs at the end of the year. So budget carefully--and check your accounts for this year to make sure you use up all the money before Jan. 1.

By the way, if you are your own boss, consider setting up a Keogh retirement savings account, if you haven't already. Your contributions are made with pretax dollars and grow tax-free as long as they're in the plan. Under the new tax law, you can contribute up to $35,000 a year into a Keogh plan for 2001, up from $30,000 last year. While you don't have to start funding the plan until the due date of your tax return (including extensions), you must set up your Keogh by Dec. 31 to qualify for a deduction on your 2001 taxes.

GIVE GOOD GIFT

This is a good time to make a tax-free gift of up to $10,000 a year ($20,000 if you're a married couple) to anyone you want--family member, friend, hardworking FORTUNE journalist--for any reason at all. You can give away anything--cash, stock, art, real estate. There's no limit on the total amount you can give each year, as long as no single individual receives more than the $10,000 limit. And the gifts will reduce the size of your taxable estate (currently the taxable estate amount is over $675,000; it rises to $1 million in 2002 and $3.5 million in 2009). But if you want to spread your largesse, you have to do it by Dec. 31 or you'll lose the gift-tax exclusion for 2001; you can't roll it over to future years.

If you're giving money to young children, says Jeff Scroggin, an Atlanta-based lawyer who specializes in tax and estate planning, consider setting up a so-called Crummey Minor's Trust for your kids. (The name refers not to any anticipated rotten returns, but to one Mr. Crummey, a California taxpayer who successfully took on the IRS.) Unlike most other trusts, a Crummey doesn't require you to fork over the money to your kids once they reach 21; you can delay distribution to any age you like. There's just one catch: Every time you put money in the trust, you have to give your child a 30-day period in which to take it out. (The child cannot, however, demand any money that has previously built up in the trust.) Otherwise your payments into the trust won't qualify for the $10,000 gift-tax exclusion. But, says Scroggin, that wrinkle can usually be ironed out with a little family negotiation. "You can take the kid behind the woodpile and say, 'Look, if you even think about touching this money, bad things will happen to you,' " he says. Bad things, for instance, like no future payments or disinheritance.

MAKE A CHARITY HAPPY

If you're like many of us, you want to give more to charities in this horrific year than you did in years past. Both you and the charity of your choice will benefit most if you give appreciated stock instead of cash. Just be sure you don't wait until the very end of the year: It will probably take your broker several days to transfer your stock to the charity. By donating stock, you'll get a deduction for the full fair market value of the shares (as long as you've owned them for more than a year), but neither you nor the charity will pay any tax on the capital gain. The reverse scenario, however, does not hold true: It's never a good idea to donate stock that has tanked since you bought it. Say you bought 100 shares of Lucent in May 2000 for $60 a share and it's now trading at $8. If you decide to donate the stock to charity, you'll get to deduct the $800 the stock is worth now, but you won't get to recognize the $5,200 capital loss you incurred. "That's a situation where you should be selling the stock and giving them the proceeds," says J.P. Morgan's Weigandt. "The charity ends up in the same position, and you get to capture the tax loss."

If you're planning to donate significant chunks of money to charity regularly and don't feel like managing the contributions yourself, consider a so-called donor-advised fund, now offered by most mutual fund companies. As with regular mutual funds, there's a minimum investment requirement (usually about $10,000) and annual fees (up to 3% of your account balance); the fees are deductible. You get a tax deduction every time you put money into the fund, but you can delay making distributions from the fund to various charities for as long as you like.

What if you want to make some donations in cash but feel a bit strapped right now? Do it with your credit card. You'll get the deduction for 2001, even if you can't pay the bill until 2002. And you'll have the satisfaction of knowing that your plastic has never been put to better use.

FEEDBACK: jrevell@fortunemail.com