By Humberto Cruz

Before the end of the year, my wife, Georgina, and I will sell some of our mutual fund shares for tax-free capital gains (then buy them back). I'll double-check to make sure we're putting in the maximum in our tax-deferred retirement plans.

And I will finish tweaking a spreadsheet to keep track of our taxable income for 2010 so we stay in the 15 percent bracket.

All of this will save us thousands of dollars in taxes.

Everybody's situation is different and these moves may not all apply to you or save you as much. But the idea works for all taxpayers: By taking the time to plan now, you save loads of time later and possibly a nice chunk of change.

More than just year-end 2009 planning, I'm emphasizing planning for 2010 now.

Because we planned a year ago for 2009, we had no trouble keeping our taxable income well within the 15 percent bracket and are able to realize tax-free gains now.

I'll explain. For the 2008, 2009 and 2010 tax years, qualified stock dividends and long-term capital gains are tax-free as long as total taxable income, counting the dividends and gains, does not exceed the limit for the 15 percent bracket. For 2009, that limit is $67,900. Taxable income is adjusted gross income on the bottom line on the front of the 1040 form minus exemptions and deductions.

By contributing the maximum to our retirement plans, Georgina and I reduced both our adjusted gross income and taxable income for 2009.

By keeping tabs of our taxable income throughout the year, we saw the impact some decisions would have had on our tax bracket. Within our overall asset allocation for investments, for example, we minimized those that generated taxable income in 2009.

Thanks to this planning, we can realize as much as $10,000 in long-term capital gains now and pay zero tax because the $10,000 will still leave us in the 15 percent bracket. We can sell our funds one day and buy them back the next, establishing a new, higher "cost basis" for the shares. The new higher purchase price will lower future taxes or at least maximize tax losses we can claim when we sell again.

For gains to qualify as long term, you must hold a security more than a year, so this is not a strategy for quick traders. If you incurred or are declaring investment losses for 2009 (for example, if you have a loss carryover from 2008), any gains you realize in 2009 will first be used to offset those losses. Until the losses are offset, you gain no additional advantage from a tax-free gain.

For 2010, the top of the 15 percent bracket will be $68,000 for couples filing jointly and $34,000 for singles. For all the numbers, go to www.irs.gov and do a search for 2010 tax brackets. The next highest bracket jumps to 25 percent - the largest increase between any two brackets - so we really try to stay at 15 percent.

To help us, we keep a running total of our taxable income throughout the year. I recommend all taxpayers do the same. Remember to reduce your income by any deductible retirement plan contributions and by personal exemptions ($3,650 each person for 2010, including filers and dependents) and deductions ($11,400 standard deduction for joint filers for 2010). For the deduction numbers that apply to you, check the IRS Web site.

 

Careful Planning Can Save You Thousands at Tax Time

© Humberto Cruz