6 Year-End Tax Moves to Make Now

2008 may best be forgotten, but these tax tips may ease the financial pain.


Shabby economy or not, the IRS is gearing up to settle accounts with taxpayers.

But while the agency is focusing on the upcoming tax-filing season, taxpayers may want to target the dwindling days of December as a chance to squeeze in tax-saving maneuvers before the curtain drops December 31 on most strategies for the 2008 tax year.

Manage losses. It's easy to find losses in most stock portfolios these days, so why not make those lemons less sour? Losses you take on sales before the end of the year can offset any taxable gains you rang up earlier—and also offset up to $3,000 a year of wages and other taxable income. Leftover losses can be carried over to offset taxable income in future years.

Tactic for a turnaround: Believe your dogs will turn frisky? One option is to sell shares for a tax loss and then, after a mandatory waiting period of more than 30 days, buy the same ones again.

To avoid the 30-day wait, you can look for shares to immediately buy in a different but comparable firm; mutual fund investors often can switch among similar funds within the same fund group.

Manage gains. Assuming you're fortunate enough to have gains you want to cash in on, the good news for sales before year-end is that you typically pay a top rate of just 15 percent on gains from stock held longer than a year. That long-term capital-gains rate may be worth grabbing now; some investors fear it will go up when a new administration and Congress take over in Washington. You could even buy back the same stock; because you sold at a gain, no 30-day waiting period is required.

Still better: People in the lowest two income-tax brackets—taxable income this year, for example, of up to $65,100 on a joint return after deductions and exemptions—pay zero tax on long-term gains. That's new starting with the 2008 tax year.

Warning: A large gain could push the taxpayer into a higher bracket, making part of the gain subject to the 15 percent rate.

Undo a Roth IRA. Has your Roth taken a bath? That's especially painful if earlier this year you converted from a traditional IRA into a Roth because of the Roth's less restrictive and tax-free withdrawals.

People who did that from an IRA they funded with deductible contributions must pay tax on the value of the assets at the time of transfer—which, since the market has tanked, is likely to be higher than the account's current value.

Wish you'd never made the switch? The IRS allows you to reverse your transfer and go back to a traditional IRA, thus avoiding the inflated tax hit. You have until October 2009 to do that for the 2008 tax year, but you may want to get it out of the way now when values are low.

You can return to a Roth by later doing another IRA-to-Roth transfer—the waiting period to do that varies but can be as little as 30 days. The taxable value of that new transfer will presumably be less than what you faced on the shift you undid.

Stretch your budget. Although extra spending seems out of favor these days, advancing planned expenditures from early next year into this one can boost your 2008 deductions. That may even allow some people who typically claim the standard deduction to deduct more than that by itemizing a larger amount of deductible items for 2008.

Among the possibilities: Pay in late December an installment of estimated state tax that's not due until January; make a mortgage payment that's due early next month before year-end; replace a car or SUV you use for business to grab a special enlarged depreciation deduction available for 2008; update a computer or other equipment used in your home-based business.

Teachers who buy classroom supplies should note there's a revived deduction for up to $250 on such spending. That break was to expire after last year, but it was extended only two months ago for this year and next. You don't have to claim itemized deductions to take it.

Warning: You'll want to be wary if your large deductions or other tax affairs cause you to be hit by the alternative minimum tax, or AMT. Advancing a payment of state or local income or property tax, for example, can backfire since such taxes are among the items not deductible when calculating the supplemental AMT levy.