Thursday, December 03, 2009

Five Investor Tax Tips You Wont See Anywhere Else

First, let me preface this article with the statement that I am not a CPA or a tax attorney, and any of the following suggestions should be run past your own CPA and/or tax attorney. Second, some of these suggestions may trigger or adversely affect the Alternative Minimum Tax. Your tax advisor can advise you on this. I tried to come up with some out-of-the-ordinary tips that you normally wouldn't see written about elsewhere.

1. Donations to Colleges
Planning on donating money to your alma mater? Do it now, even though you technically have until the end of the year to send it in, and still get the tax deduction for it this year. Here's the issue. Most colleges shut down on Friday, December 18, or even Thursday, December 17. I've sent donations to my college during the last week of December, and end up getting receipt letters saying "Thank you for your generous donation of $_____. Please consider this letter your receipt…." etc. Of course the letter is dated January 5 or 6th during the week when college starts back up again. Although it shouldn't technically be a problem to take the deduction for the current year, if you get audited, it would be helpful to have a receipt letter dated in the current year. If you have the money now, why wait? Make your college happy before Christmas.

2. Anonymous Donations to Charity
If you have ever wanted to make a totally anonymous donation to a charity (and there are several reasons you may want to) but still want to be able to take a tax deduction, here is what you can do. Go to your local post office and buy some Postal Money Orders. You are allowed up to $1000 per money order, and if you request more than three at once, the Post Office will request identification from you. On the money orders, write the name of the charity where it says "Pay to" along with the charity's address, but leave the part where it says "From" blank. However, on the receipt, which you will keep with your tax records, you can fill in everything. As for the original, send it in to the charitable organization in a plain envelope and no one will be able to trace it back to you.

3. Worthless Stocks
According to the IRS, "a taxpayer who owns stock that was acquired on the open market for investment and that has declined in value is allowed a deduction for a capital loss in the taxable year in which the stock is sold or exchanged or becomes wholly worthless." But the big question is "When do they become worthless?" Worthless is kind of a nebulous word. Just because a company declares bankruptcy, doesn't necessarily mean that the stock stops trading. And I've seen on stock tips web site a stock stop trading for a year or two then start up again. If you have the stock in the form of a certificate, there are companies that will buy your old certificates as collectibles. It may not be much, maybe only a dollar, unless the company is in an unusual industry or has an interesting picture on it. The sale may be considered a transaction for capital loss purposes (as always, ask your tax advisor).

By the way, if a public company committed accounting fraud, you cannot deduct the loss as a theft loss. The IRS states that they will disallow such deductions and may impose penalties.

4. Short Selling
If you are a short seller, and you short a lot of stocks that pay dividends, remember that technically you owe and pay the dividends to the owner of the shares that you shorted. Since this is an investment expense, make sure your accountant includes it as a deduction.

5. Municipal Bonds from US Territories
For the owners of a diverse portfolio of municipal bonds who live in states with income taxes, remember that if you have any munis from Puerto Rico, the Virgin Islands, or Guam, the income is exempt from state income taxes. On the Tax Statement Form from brokerage firms, generally all income from municipal bonds are lumped together in the same section. If you live in New York, and you own munis from New York, California, Puerto Rico, and Texas, the interest on the New York and Puerto Rico bonds are exempt. Occasionally, staff workers at accounting firms may carve out (in this case) just the New York interest, and lump all the other interest together, including the Puerto Rico interest, as taxable New York income. Of course, it's always a good idea to check your entire return before you sign it.

You will of course see a lot of other tax saving tip articles this month. A couple things to keep in mind. Many income and deduction adjustments can trigger the AMT. Also, if you expect your income to be much higher next year, take a longer term approach to planning your deductions. As previously mentioned, check any tax techniques, the ones above and any others that you read about, with your tax advisor.



LC David said...

Excellent Five Investor Tax tips..
Income Tax Preparation

Jean said...

Do you know if most of these tips apply to Canadian citizen?

Great article!