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Money Cents

Trim Your Tax Bill
By Shelley Phillips-Mills
Feb 28, 2005 - 12:38:00 PM

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Just as you need to think about your health year-round, you should also keep your taxes in mind throughout the year, not just when you rush to your accountant with your W-2 forms. Here are several healthy habits you can practice all year long to minimize your tax bill.

It is better to give. By gifting appreciated securities to children or charities, you can avoid capital gains taxes while helping a child pay for college or contributing to a worthwhile non-profit organization. Children can typically sell the securities at a lower tax rate than you can, and a charity would not have to pay any taxes on the gift. In addition, if you gift securities to a charity, youíll get a charitable contribution deduction for their fair market value, if you have held them for over a year. A word of caution Ė avoid gifting securities which have incurred a loss as you can sell them and claim a tax deduction for the loss.

Build your nest egg. You should maximize contributions to your Individual Retirement Account (IRA) and your employer-sponsored retirement plan (such as a 401(k)), as they both offer tax advantages. Most individuals can make pre-tax contributions of up to $14,000 in 2005 in an employer-sponsored plan. If you contribute to a SIMPLE IRA, you may be able to make pre-tax contributions of up to $10,000 and if you contribute to a traditional IRA you may be able to deduct up to $4,000. In addition, if you are over age 50 you may be able to reduce your tax bill further with catch up contributions to your retirement plan. These limits are for 2005 and are scheduled to increase over the next couple of years. Talk with your tax advisor and financial consultant about the best way to take advantage of contributions to your retirement plan.

Pay it forward. Most taxpayers are allowed to offset ordinary taxable income with up to $3,000 in capital losses. For example, say you sold a stock at a loss of $4,000. This loss would first offset capital gains recognized in the year. Letís assume you had no capital gains this year. Then you would be eligible to reduce your taxable income by $3,000 this year, and carry forward the leftover $1,000 to reduce next yearís taxable income. It is important to review any losses you have incurred in previous years to be sure you arenít overlooking a deduction for this year.

Watch the wash. The wash sale rule says if you sell an investment at a loss, you cannot repurchase the same investment either 30 days before selling it or 30 days after the sale and still claim a loss on your taxes. It is important to keep in mind that this applies to the purchase of any securities, which are the same, or substantially identical to the security you sold to generate the loss.

Talk with your financial consultant about ways you can keep more of your money to afford the things you want. If you would like to receive the publication, Tax Saver: Practicing Healthy Tax Habits Can Help Save You Money, by A.G. Edwards & Sons, please contact financial consultant, Shelley Phillips-Mills in Bangor at 800-947-5456.


*A.G. Edwards does not offer tax or legal advice. Please seek the advice of a qualified professional. It is A.G. Edwards view that investment decisions should be based on investment merit, not solely on tax considerations.

This article provided by A.G. Edwards & Sons, Inc. Member SIPC.


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