(MONEY Magazine) – We understand if the only plans you want to make now revolve around reunions with friends and family at the holidays. But there's another date that you should be preparing for: April 15, 2002. If you hope to trim your 2001 tax bill, the month of December is the time to do so. A familiar warning, to be sure, and in the box on page 168 you'll find a list of the deadlines that loom every Dec. 31. But two events this year--the steep market drop and the new tax law--have made it more important than ever to plan early. Here's how those two factors could affect your tax planning.

Prep for the rate cut. Year-end tax moves often boil down to a simple maxim: Take all the deductions you can by Dec. 31 and delay any income you can until after Jan. 1. With the four top income tax rates scheduled to fall by another half-point in 2002, that advice may seem especially apt this year. After all, why pay 2001's higher rates on more income than necessary? You can build up deductions by, say, prepaying your state tax bill, making an extra mortgage payment or donating to charity. As for income, you may be able to delay rental or freelance income, commissions or even a year-end bonus until after Jan. 1.

But tax reform has also made this strategy more treacherous, because next year's lower rates will put more taxpayers at risk of owing the alternative minimum tax (AMT), thereby missing out on the full tax cut. (In general, you must figure your tax liability under regular tax rates and the AMT; you owe whichever is higher. The AMT rate is lower than the top income rates, but it applies to more income.)

Before you manipulate your income, therefore, your first step should be to estimate your income and tax bill for this year and next, including whether you'll be subject to the AMT. You can do that by using the TurboTax Tax Relief Estimator at www.quicken.com/taxes.

The reason that the AMT can undermine the traditional accelerate-deductions/defer-income strategy is that the calculation adds some of the most valuable write-offs, including state and local taxes and personal exemptions, back into your taxable income. So if you expect to owe the AMT this year but not next year, there's little point in taking extra deductions now. Instead, hold off until next year and look for ways to accelerate income into 2001, when it'll be subject to the 26% or 28% AMT rate. If it looks as if you'll be among the estimated 2.7 million Americans who will pay the AMT in 2002 but don't owe it this year, take as many deductions as you can before the end of December.

Finally, before you push off income into next year, check out the box on page 170. Congress tucked a slew of new breaks into the tax law, including more generous education perks. But your adjusted gross income must fall within certain limits for you to qualify.

Capitalize on losses. With the S&P 500 down 28.6% from its peak in March 2000 and 17.4% for the year (through mid-October) and the Nasdaq off 66.4% and 31.3% for the same periods, you may be sitting on some valuable tax losses. Of course, selling a losing fund or stock is an investment choice, not a tax move. For help deciding when to part with a loser, see "Get Back on Track" on page 89. Once you've concluded that it makes investment sense to sell, here's what you need to know to make the most of the loss rules.

--The basics. What makes investment losses somewhat easier to swallow is that you can use them to cut your taxes. First, you must use your losses to offset capital gains. To do so, you have to match long-term losses (those on securities held for more than a year) against long-term gains, most of which are taxed at 20%, and short-term losses against short-term gains, which are taxed as ordinary income, or as much as 39.1%. After that, any remaining losses can be applied to any additional gains.

If you don't have any gains--or if your losses exceed your profits--you can deduct up to $3,000 in losses against ordinary income. For someone in the 30.5% bracket this year ($109,250 in adjusted gross income for married couples filing jointly; $65,550 for single filers), that would mean a $915 tax savings. You can carry forward unused capital losses indefinitely.

Say you want to lock in a tax loss and stay invested. If you buy the same investment within 30 days of selling it, you won't be able to claim a loss. This wash-sale rule even applies if you buy (and keep) new shares before you sell your losing ones. One way to get around the 30-day wait is to buy a stock or fund that's similar to the one you sold--say, Merck in the place of Pfizer. With mutual funds, the rules are hazier. "The IRS says selling a fund of one company and replacing it with a fund of another is okay," says Mark Luscombe, principal federal tax analyst at publisher CCH. "But the IRS doesn't address index funds, which have the same holdings." Even though the IRS has never disallowed an index fund swap, some tax pros advise against it.

--When timing matters. Selling mutual fund shares is best done well before Dec. 31. That's because most funds--even those with investment losses for the year--distribute dividend income and realized capital gains to shareholders in December. Just as you shouldn't buy a fund right before the distribution (if you do, you'll owe taxes on income that you didn't earn), you're almost always better off selling before the distribution. Even if you could take a greater loss on the fund, that might not make up for the taxes you would owe on the distribution, especially if that payout is dividend income taxed at ordinary rates.

You should be able to find out your fund's distribution date by November, by either calling or checking its website. And some fund companies, including Fidelity, T. Rowe Price and Vanguard, provide year-end distribution estimates.

--Name names. If you're selling only a portion of your stake in a particular stock or fund, taking the time to decide which shares to sell can pay off on your tax bill. The IRS lets you calculate your cost basis in any one of several ways, including first in/first out (FIFO), specific-share identification and, in the case of funds, average cost. If you don't specify which stock or fund shares you are selling at the time of the sale, the IRS will assume that you sold the first shares you bought, or FIFO.

But selling specific shares can be the most tax-efficient. If you're trying to generate the biggest loss possible, for instance, you should sell your most expensive ones, which may not be the oldest. Or if you want to keep your loss to within the $3,000 annual deduction cap, you may want to sell cheaper ones. If you're looking to offset a particular capital gain, take into account how long you've held the shares. "You should consider not only the amount of the gain or loss but whether it is long term or short term," says Sam Beardsley, head of the investment tax department at T. Rowe Price.

When it comes to selling a fund, the easiest method by far is average cost--your total investment divided by the number of shares. Most fund companies provide a year-end gain or loss calculation based on your average cost. If you decide to identify specific shares, notify the fund company or broker before you sell--and keep very careful records.

One final note: If you use average cost to sell a fund, you can't use any form of specific identification (such as FIFO or highest cost) for subsequent sales of the same fund. You may, however, switch from specific shares to average cost.

--The option trap. The market decline could be especially painful if you exercised incentive stock options, or ISOs, earlier in the year. These options are much more complicated than the nonqualified options most employees receive. With nonqualified options, you owe ordinary income tax on your profits. Exercising an ISO, however, can trigger the AMT on the spread between the strike price and the fair market value the day you exercise. This is true even if you hold on to the shares, as many investors do in order to qualify for the long-term capital-gains rate. This year, that strategy could prove very costly. Say you exercised an ISO with a strike price of $50 when it was trading at $60. You could owe the AMT on $10 a share, even if the price has since fallen to $40. To eliminate any AMT liability, sell the shares by Dec. 31, says Don Weigandt, vice president for wealth advisory at J.P. Morgan Private Bank. Next year is too late. If you sell the shares for less than your strike price, you can claim a loss--sell for more, and you'll owe ordinary income tax on the difference between the strike price and the sale price.

--Rethink that rollover. Those who converted a traditional IRA to a Roth earlier this year only to watch the account value drop in the months that followed may be cursing that move. After all, you now owe ordinary income taxes on the entire amount you rolled over (minus any nondeductible contributions), despite the subsequent losses. In this case, the tax law offers you a second chance. You can switch your Roth back to a traditional IRA and then roll it into a Roth a second time. Since the account has shrunk, your tax bill will too. Here's where the year-end timing gets tricky. You can recharacterize that original conversion any time before the 2001 tax deadline, but if you do so this year, you must wait until 2002--and at least 30 days--to convert the account to a Roth again.

One final note about retirement: The new tax law lets you stash more money than ever into a slew of retirement funds next year, including IRAs and 401(k)s. You can put as much as $3,000 into a Roth or a deductible or nondeductible IRA--up to $3,500 if you're 50 or older. So your final year-end move should be to make a note to increase your retirement contributions on Jan. 1.