Seven year-end financial moves that could lower your tax bill

These strategies may save you a bundle when Uncle Sam comes knocking April 15.

from the December 3, 2007 edition

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4. Consider selling stock

Investors can use losses to offset taxable gains that they may have accrued on other investments. Hence, if someone plans to unload certain underperforming investments, then doing so before Jan. 1 could be a strategy that pays off. Those whose losses exceed capital gains may in some cases use the excess losses to reduce their earned income (i.e., from salary or wages) by as much as $3,000.

But remember: To realize these benefits, investors need to sell at a loss. And that may not be a worthwhile move if a stock is poised to rebound.

Also, full-time students age 23 and under might in certain cases want to sell stocks before year's end, Luscombe says. The reason: In 2008, they'll start getting taxed on investment income at their parents' tax rates.

5. Say 'no' to income, 'yes' to bills

Minimizing one's income before Dec. 31 can be wise, Mr. Stromsem says, if a person doesn't expect to be in a higher tax bracket next year. The logic: By delaying receipt of payment until 2008, one also delays payment of taxes on that income for more than a year and can let the money earn interest or serve other purposes in the meantime.

To act on this strategy, workers expecting a year-end bonus might ask managers to issue payment after Jan. 1. Similarly, anyone who does direct billing of customers might want to wait until early in 2008 to demand receivables. Conversely, a taxpayer can get an extra deduction by prepaying in December a property tax bill that's not due until January.

But this strategy, too, comes with a caveat. It merely postpones the inevitable tax hit, and it stands to increase one's tax liability in the year to come.

"You have to keep in mind what the effects may be not only on this year but also the opportunities for next year," Steinmetz says. If you prepay property taxes this year, she notes, "next year, you're going to be one [property tax deduction] short."

6. When bracing for winter, go green

Homeowners can save on tax bills as well as utility bills if they make particular green investments before Jan. 1. That's because a range of energy-saving improvements, such as adding certain types of insulation or windows, qualify for a soon-to-expire $500 tax credit. (Unlike deductions, which reduce the amount on which a person pays taxes, credits are subtracted directly from one's tax bill.)

Before taking the plunge, Stromsem says, homeowners ought to check with a tax preparer or the IRS to make sure the desired project qualifies for a credit. If it does, then it could pay to act before January. This move might make sense, Stromsem says, "if you were going to buy storm windows anyway."

7. Keep an eye on Congress

Congress reconvenes this week and lawmakers could tinker with the tax code before their Christmas recess, or even pass legislation in 2008 that would be retroactive for the 2007 tax year.

With many provisions set to expire both this year and in the near future, Congress just might make a few moves with immediate implications, says Mark Steber, vice president of Jackson Hewitt Tax Service, a tax preparation firm based in Parsippany, N.J.

"There's certainly a lot brewing [in the Capitol], from alternative minimum tax to tax credit modification," Mr. Steber says. "We don't know what's going to happen, but it'll happen late. People need to pay especially close attention this year because [new laws] may put more money in their pockets."

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