Best Life - April 2009

INVESTMENTS
Cut Your Taxes
Money-saving moves your accountant is likely to overlook

Mike the accountant has been doing my taxes for 15 years. I’d always pegged him for a guy who worked all the time and spent his few off-hours sacked out in front of the television. Then, at our last sit-down, I casually asked after Mike’s wife.

“Uh, I got divorced and remarried…and I have two new kids,” he said. Who knew? Mike the accountant actually has a life, one that is as filled with failure and triumph as yours or mine.

More important, so do his clients. But Mike knows nothing about my family except for what’s on the

W- 2 and in our receipts. And what your accountant doesn’t know can cost you money. There are plenty of potentially tax-saving moves that you might be making—or be willing to make—but it never comes up in your once-a-year conversation. “Often it’s just ‘Give me the data; here are your returns,’ ” laments Gary Schatsky, a New York–based financial planner.

So, rule number one is to get in touch with your accountant before the end of the year, when he’s not crazed, and discuss ways to minimize your tax exposure. Once receipt-dump season rolls around, it’s too late. We consulted accounting experts and financial planners to find ways to save money that Mike never mentioned. DEVIN LEONARD

SHEAR GENIUS Trim thousands from your tax burden.

It’s Time to Weatherproof Three years ago, Congress instituted tax credits for insulating homes and buying energy-efficient appliances such as boilers. The tax break was not in effect last year, but it is back in effect for 2009. (Government logic: Energy efficiency makes sense only occasionally.) Just be sure to tell your accountant about those new double-pane windows. “I’m not going to know if a client has made a home improvement unless he tells me,” says Kristine McKinley, a financial planner in Lee’s Summit, Missouri. Some hybrid vehicles,

such as the Ford Escape, will also earn you a tax credit. And families who buy a first house after April 8, 2008, and before July 1, 2009, are entitled to a $7,500 tax credit. (More logic: Buy a house on July 2 and you are unworthy!)

Avoid Double Taxation A smart tax move is to sell clobbered stocks and deduct the losses. (Then reinvest the cash immediately in different stocks). If you haven’t done so, do it now. But a lesser-known trick is to avoid double taxation on dividends paid by your mutual funds. Ed Slott, a

New York accountant, explains that as stocks in your funds pay dividends, you pay taxes on that payout, even though many fund companies reinvest the dividends instead of paying them out to shareholders. Here’s the problem: Once you sell the fund, you are taxed on your gains, even though some of that gain is dividend income you have already paid taxes on. Ask your accountant to look at your old tax returns to see what the IRS has billed you for, and then adjust accordingly. “Most people don’t know to question that,” says Slott. “Your accountant might not either.”

Did You Convert Your IRA? Many investors converted traditional IRAs to Roth IRAs last year as the market fell, because fewer taxes are incurred when the market is down. The problem? Stocks kept falling. So if you sold, say, after losing 20 percent, you owe more than if you’d waited for the full 40 percent drop. But those taxes disappear if you change your Roth back to a plain-vanilla IRA before April 15. As far as the IRS is concerned, it’s as though the original switcheroo never happened. You can always reconvert after 30 days.

TAX TIPS FOR A POST-BAILOUT WORLD How to keep the IRS from getting every last cent

While we don’t know for sure what impact the Obama administration will have on our wallets, we do know that the Bush tax cuts are likely to be repealed at some point. Someone has to pay for all those bailouts, and it’s likely to be you. Here are three moves to protect your cash flow.

BUY MUNICIPAL BONDS TAKE LONG-TERM CAPITAL GAINS PLAN CHARITABLE DONATIONS CAREFULLY Higher tax rates make tax-free investments even This year may be your last chance to sell an If you expect your taxes to go up substantially more valuable. If the top marginal rate goes to investment—whether it’s stock or your lakefront next year, postpone any major charitable 39. 6 percent—and some fear it could go higher— cottage—and pay taxes at what could be gifts until 2010, says financial planner Kristine a muni bond that yields 5 percent will have the tax remembered as a very low rate ( 15 percent), McKinley. That way, you’ll capture more tax equivalent yield of about 8 percent (or higher if says Stewart Welch, a financial planner in benefits. D .L . you pay state and city taxes). What’s more, munis Birmingham, Alabama. might increase in value as investors rush in.