Adjusting Your Investments for Tax Savings

    Adjusting Your Investments for Tax Savings 


    2011 was a hard year for many and most investors who lost significant chunks of their investments with the drops in the markets. As 2011 comes to a wrap, this may be a good time to adjust your investments so as to take tax savings. Below are some moves you may consider;

    Making a Charity Donation from your IRA Fund


    For the 2011 tax year, taxpayers will be allowed to donate their IRA funds directly to charity organizations as long as they are 70.5 years old and such donations are made directly to qualifying charities. Such a donation will be tax exempt as long as it is within the cap of $100,000. However, this tax benefit is not available in 2012 unless Congress passes a law to extend the benefit. Therefore, tax professionals are advising that taxpayers consider making such a donation before the year's end to enjoy the benefit. However, the mood in Congress is that an extension will be made for this tax benefit at least until the end of 2012.

    Adjusting Your IRA


    Taxpayers who transferred their traditional IRAs to Roth IRAs within 2011 can re-characterize the move by reversing the funds back to a traditional IRA before year end or before the allowed timelines so as to avoid paying taxes on the retirement fund. Earlier in the year, many taxpayers transferred their IRA from traditional to Roth. This is because the funds had significantly lost in value with the markets and tax professionals advised taxpayers to pay tax on the depreciated fund to have funds converted to a Roth account. This way, any appreciations and withdrawals under the Roth account would be tax exempt. However, some of the funds that were transferred to a Roth account lost further value. Therefore, since tax is paid on value at the time of conversion, the taxpayer will be expected to pay taxes for funds that they have already lost. However, if they re-characterize the fund by converting it back to a traditional account, they get to avoid paying tax. They can make another conversion to Roth later on. To avoid paying taxes on the conversion, one needs to re-characterize within a given timeline.

    Handling Your Stocks


    There are two ways that you can handle your stock portfolio to save on taxes. With the shares that have lost in value as the markets went down, it may be wise to consider selling such stocks. If you still wish to keep the stocks, you can buy them back next year. There should be no much movement in stock prices between now and next year. By selling the depreciated stocks, you get to claim a deduction against Capital Gain loss. However, such stocks need to have been in your portfolio for more than a year. If you wish to donate depreciated stocks to a charity, it is advisable to sell the shares, claim the Capital Gain loss, and donate the sales proceeds. On the other hand, in the rare event that some stocks significantly appreciated in value, it is more advantageous to donate the stocks to charity organizations as they are. This way, you get to take a tax deduction on the market value and not the purchase price. You also avoid paying capital gain tax.

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