Annually, business publications have at least one article on end of year tax advice. When I read them, I don’t find anything particularly enlightening. It’s the same every year. Here is the playbook.
- Sell off losing stocks and take the loss, writing it against any income.
- Declare some capital gains this year because the cap gains tax may go up next year. I never see articles telling you to hold because the tax may go down, but that’s another story.
- If you have the means, make cash/stock gifts to people close to you. (I am still waiting for mine.)
- Maximize contributions to your retirement plan.
- Make an extra mortgage payment
- Donate to charity.
I am sure it’s financially prudent to do all these things. However, it’s all accounting to me. In years I made a lot of money trading, I found that I still got snared by the Alternative Minimum Tax in a lot of instances, so it just didn’t matter. As a commodity trader, your taxes are a blended rate. But, all gains and losses are marked to market on December 31, so if you have gains you write a nice check-even though the market could turn against you January 1. By the way, I have been there done that.
I used to do all I could, but now there is so much mumbo jumbo and uncertainty that it doesn’t seem to make a difference. I prefer keeping my head down and trying to make money, not worry about the IRS. However, if they draw the tax lines a lot differently than they are today, I will make different decisions going forward. For example, I will make sure I pigeonhole myself into the tax bracket where I pay the least, since a lot of my income is self determined.
Here’s my advice. When you have a loser, analyze why you even hold the position in the first place. If conditions have changed, buy more or sell. All prior money invested is a sunk cost. If you have the means to give to other people, don’t wait for December 31. Give all year. You will get more out of it and so will they. Give monthly to your retirement, and then you won’t worry about social security not being there when you can’t earn money anymore or want to take a break. And on mortgage payments, try not to even have a mortgage. Maybe just rent. My guess is that there will be a lot of financial scoring of state finances and tax rates real soon-renting keeps you flexible.
By the way, the alternative minimum tax is how the politicians in Washington are going to compromise on the fiscal cliff. Republicans will be able to tell their constituents they held the line on tax rates. Democrats will be able to tell theirs they are getting those evil rich bastards and corporations. The middle class is going to get pinched. If you haven’t paid the AMT, it’s a doozie.