Watch Out for Capital Gain Distributions in 2008
Written by Kristine McKinley · December 1, 2008
Despite widespread stock market losses in 2008, several mutual fund companies have announced that they will make capital gain distributions to shareholders in mid-December.
This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund. This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.
So why do mutual fund companies distribute capital gains to shareholders when the fund itself has incurred a loss for the year? There are three reasons that funds are making payouts, even though they’re up to their ears in losses:
First, emerging markets and energy funds had big gains when the year began and realized some gains along the way. Then they suffered redemptions, which means that those gains have to be spread among fewer shareholders (i.e., the shareholders who did not bail have to pay the price for those who are trying to time the market).
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Donating Your RMD To Charity - Law Extended for 2008 & 2009
Written by Kristine McKinley · December 1, 2008
The Pension Protection Act of 2006 allows IRA owners age 70 1/2 or older to make direct transfers of up to $100,000 per year from their IRA to a charity. The provision became available for IRA distributions taken after Aug. 17, 2006 and originally only applied through the end of 2007. Note: the Emergency Economic Stabilization Act of 2008 extends this law to include 2008 and 2009.
Distributions can be made from taxable funds in an IRA or Roth IRA, but not from employer plans or SEP and SIMPLE IRAs. The distribution will not be taxable to you, but you don’t get to deduct the charitable contribution on your tax return. This is more advantageous to taxpayers because even though you get a charitable deduction if you take the IRA withdrawal and report that amount in income, many taxpayers do not itemize, and therefore they don’t always get to take advantage of the deduction.
The direct transfer from the IRA to the charity can also satisfy a person’s required minimum distribution for the year. If you are charitably inclined, it may be best to contribute from the IRA, at least up to the RMD amount thereby avoiding that amount being included in income. This will lower your adjusted gross income (AGI) and might avoid or lessen the amount of Social Security benefits that are taxed.
The reduction in AGI can also increase tax deductions, exemptions or credits that are pegged to AGI either in terms of specified amounts or as a percentage of AGI. The distributions are deemed to come from income first if the IRA has non-deductible contributions. This contrasts with the normal pro-rata rule that applies to other IRA distributions where there are after-tax funds in the IRA.
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Say Goodbye to 2008 with Some Smart Tax Moves
Written by Kristine McKinley · December 1, 2008
December’s a busy month with holiday preparations, but it’s not too late to focus on last-minute tax savings. Consult with your tax professional to see if these might work for you:
Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.
Check investment gains and losses: After the market drops we’ve seen this year, it’s likely you have some capital losses in your taxable investment accounts. It might make sense to sell and offset them against any capital gains you’ve realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year. Note: According to Morningstar.com a lot of mutual funds are expected to distribute capital gains to shareholders, despite funds being down 30-40%. Check your mutual funds to see if you are expected to receive a capital gain distribution; if so, it might make sense to do some tax loss selling before the December distribution to avoid another taxable event.
Continue Reading Say Goodbye to 2008 with Some Smart Tax Moves
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Get Your Charitable Donations Lined Up Before The Holidays
Written by Kristine McKinley · December 1, 2008
There’s a special sinking feeling as you approach Dec. 31 and realize you’ve done no tax planning whatsoever. That includes big issues like end-of-the-year investment decisions, and the smaller ones - like that stuff you no longer use piling up in the basement.
Charitable giving is an important part of tax planning at year-end, so let’s look at the cash and noncash aspects of giving. It makes sense to contact a tax expert or financial planner to talk about what giving makes sense for you:
You have to itemize: Only individual taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ). However, there has been talk about allowing “above the line” charitable deductions, so I’m hopeful that this tax law will change soon.
Get out the checkbook: Uncle Sam likes a record. To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution - and it definitely helps to have both. Bank records mean canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. If you remember the IRS being satisfied with personal bank registers or scribbled notes to document the donation, they’re not anymore.
Continue Reading Get Your Charitable Donations Lined Up Before The Holidays
Related PostsWhen the Road to Investing Gets Bumpy
Written by Kristine McKinley · September 24, 2008
Investing in the stock market is a lot like driving on a long road trip. At some point, you’re going to run into pot holes and rough patches. When that happens, you should definitely drive with more caution, but you have to keep on going if you want to reach your destination.
Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey. While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.
So what should you do when the road to investing gets bumpy?
Buy Low, Sell High: The whole premise behind investing is to buy low and sell high. You can’t do that if you pull out of the market or stop investing when the market goes down. If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price. Who doesn’t love a good sale?
Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified. If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year. Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals. In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.
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