The year is drawing to an end and tax
season is quickly approaching. Although
appropriate financial planning is a yearround
concern, now is a good time to take
steps to help reduce the impact of taxes on
your finances and to get a
jump start on next
year's planning. I
have detailed here
some useful information
to get you started.
* If you were
fortunate enough to
realize capital gains this year, you may offset
those gains by selling stock or other
securities at a loss. Long-term capital gains
result from the sales of capital assets such
as stocks or bonds held for longer than
one year. The maximum long-term capital
gains tax rate is 20 percent.
* If your capital losses exceed your capital
gains, you may deduct the losses dollarfor-
dollar against ordinary income up to
$3,000. Any excess losses (over the $3,000
limit) may be carried over to future
years and, maybe, future tax savings.
* Be careful of "wash sales." If you plan
to repurchase the same security you sell to
generate a capital loss, the loss will be disallowed
if a "wash sale" occurs. The "wash
sale" rule states: "You may not take a loss
if, within a period beginning 30 days
before you sell your security and ending 30
days after that date (a period covering 61
days), you have acquired substantially
identical stock or securities." If a wash sale
occurs, the loss is deferred until the newly
acquired stock is eventually sold or disposed
of. The risk of being out of the
market is that your security might appreciate
in value within the 30-day period. You
would then be forced to repurchase at a
higher price.
* If you have purchased the same stock
at different times and plan to sell some,
you can reduce your capital gain by
instructing your financial consultant to sell
those shares with the highest cost basis
first. According to IRS regulations, if you
do not provide specific instructions, the
shares you have held longest will be sold
first.
* Gift away what you don't need. You
may gift up to $11,000 ($22,000 for married
couples) per individual without triggering
a gift tax liability.When you gift
away a portion of your assets, those assets
and all their future appreciation, dividends
and interest are removed from your gross
estate. Keep in mind that any medical and
tuition payments made directly to the
provider are not considered gifts and are
therefore excluded from the $11,000 gifting
limit.
* Consider taxable bonds for your
accounts. Investments that pay fully taxable
interest including Treasuries, preferred
stocks, mortgage-backed securities
and the like are an important part of a
properly allocated portfolio. However, you
don't have to pay tax on your income
immediately; let interest compound taxdeferred
by buying these investments for
your IRA or other qualified retirement
account.
And, while we're on the subject of
retirement plans:
* Increase contributions to your
employer retirement plan. Not only will
you accumulate more for retirement, you
will also receive immediate tax deferral on
those contributions. Better still, many
employers offer matching contributions.
So, if your employer offers a 401(k) or an
alternative tax-deferred qualified plan, take
full advantage. Under current law, you can
contribute up to 100 percent of your salary
to a maximum of $11,000 ($12,000 for
those age 50 and older with the catch-up
provision).
* Not covered by a plan at work?
Contribute the maximum to either a Roth
or traditional IRA. You can fund your
2002 IRA until April 15, 2003. The maximum
contribution for an individual is
$3,000, $3,500 if you're age 50 or older. If
you have a non-working spouse (or if your
spouse elects to be treated as a nonworking
spouse), establish a spousal IRA you
may make combined contributions up to
$6,000 ($7,000 if 50 or older). And, making
your 2003 contributions early in
January can add many months of interest
to your nest egg.
* If you're self-employed, establish a
qualified retirement plan. Set up a Keogh
or Simplified Employee Pension Plan
(SEP). You'll be able to shelter up to 25
percent of your income per year in
most cases, to a maximum of $40,000. The
last day to establish a Keogh is Dec. 31,
2002. You have until April 15, 2003 to
establish a SEP later if you have an
extension.
These are just of few of the tax savings
ideas you can use now. Of course, you
should review these ideas with your tax
and financial advisors before taking action.
Salomon Smith Barney does not provide
tax or legal advice.We recommend
that you review your complete financial
situation with your tax advisor before making
any major changes to your portfolio.
Kathy DiCenso is a financial consultant
with Salomon Smith Barney in Reno.
