Five Timely Tips To Cut Your Tax Exposure

It’s been a hard year to stomach with the stock market’s slide and sour economic climate, but there are a few good tax moves you can make now to sweeten your potential tax savings.

Knowing that your tax burden won’t be so bad or your refund a little bigger may help lift your spirits.

For the most part, however, you have to act before Dec. 31 to cut your tax bill next spring. Here's five tips.

Wall Street, New York City.
Photo: Oliver Quillia for
Wall Street, New York City.

1. Sell Losing Investments

Taking a loss on failing investments (stocks, real estate, even collectibles) may help you offset taxes you’ll have to pay on other gains or income.

You can use up to $3,000 of capital losses to offset ordinary income (your salary and interest income) every year. This applies to taxable accounts, not your IRA or 401(k).

Paper losses don't count, so you may want to sell some investments now. Also take into account stock dividends that you reinvested in the same company and brokers’ commissions that may increase your loss.

It’s been a bad year—with the stock market down about 40 percent—so some investors may have a lot more than $3,000 in losses. You can carry that loss forward to your 2009 tax return—or indefinitely, if necessary. It's a gift that keeps on giving.

2. Convert To A Roth IRA

Now is the time to move your retirement funds into an account that lets you take the money out tax free when you retire. If you make less than $100,000 a year, you’re eligible to convert all or a portion of your traditional IRA to a Roth IRA.

There’s a slight catch: You’ll have to pay a one-time conversion tax, but it will be a lot less this year since your account value has likely decreased significantly. Plus, you don’t have to worry about paying an early withdrawal fee when making a conversion.

The great benefit of a Roth IRA is the tax-free savings. Contributions and earnings can be withdrawn tax free after age 59 1/2 (for accounts that are at least 5 years old). So, you'll repay the rewards later.

3. Increase Miscellaneous Deductions

You have to itemize on your federal tax return to take advantage of this one, but it may be worth it. Now is the time to bunch up as many miscellaneous itemized deductions as you can and many expenses related to looking for a job or boosting your resume. (It's one of the rare things that aren't prohibited by the Alternative Minimum Tax.)

Consider all of the expenses related to the job hunt or professional development that could be deductible: subscriptions to professional journals, dues for professional organizations or unions, tuition for job-related courses.

If you haven’t taken advantage of them, do it before Dec. 31. But remember, miscellaneous itemized deductions must comprise at least 2 percent of your adjusted gross income to be deducted from your federal return.

4. Donate To Charity

Charities are facing difficult financial times, too. But it is the giving season and you can get some tax savings in return for your good will. Donating clothes, toys, household goods and other items to charity before the end of the year may help you in April.

Need some help figuring out the fair market value of donated items? Go to the Salvation Army’s website for a list of average prices at their stores, covering everything from clothing to furniture to sporting goods, or even snow blowers. Software, like Turbo Tax, can also help you value donations in line with IRS guidelines so there’s no need to guess.

If you’re making a monetary contribution, the check needs to be postmarked by Dec. 31. You can also put your donation on a debit or credit card by that date; just be sure to pay the credit card bill in full when it arrives.

5. Watch Your Withholding

Getting a huge refund in April is a welcome windfall when it comes, but many taxpayers could use those extra dollars over the course of the year. Every year about 80% of taxpayers get a refund averaging over $2,300. That’s a little bit of cushion you could use now.

Use the withholdings calculator at the IRS website, or ours here, to make sure you aren’t having too much money taken out of your paycheck, then inform your employer of any changes.


Finally, always check with a tax advisor before making any big tax-related financial decisions. Ask friends and colleagues for referrals or look for a CPA/personal finance specialist through the "Find a CPA" link on the American Institute of Certified Public Accountants website.

Now is the time to get some expert help with your year-end tax planning. There have been a number of tax law changes and are likely to be many more in the Obama administration. You want to make sure that you temper your tax moves in these turbulent economic times and that they make sound financial sense for you.

(Editor's note: CNBC personal finance correspondent Sharon Epperson is the author of The Big Payoff: 8 Steps Couples Can Take To Make The Most of Their Money—And Live Richly Ever After.)