I have to believe I'm not alone in my approach to Christmas shopping. Like a few other guys I know, I start to think about stocking stuffers and other gift giving about 2 p.m. on Dec. 24 each year.
Well, this year is going to be different. Believe it or not, I just purchased my first gift to be given this coming Christmas.
Sure, it helps that the gift is a set of golf clubs for my father, whose birthday was two months ago. I was a little late getting him the clubs for his birthday, so I've decided to give them to him for Christmas instead. Now I'm early for Christmas. Give me some credit.
You know, year-end tax planning is also one of those things you shouldn't leave to the last minute.
October is precisely the right time to plan those things you're going to do before year-end to reduce, defer or eliminate tax.
Today I want to speak to investors. Consider the following ideas to cut your taxes for 2009 and beyond.
Review your asset allocation What type of income have you earned on your portfolio this year? I'm talking about your non-registered portfolio, where income is taxable.
If you've earned some highly taxed interest income, or dividends, but you don't have a need for income from the portfolio, consider whether a different proportion of your assets in fixed income can reduce your tax bill while still meeting your objectives from a risk perspective. Adjustments today can help in 2010.
Review your asset location If you have earned taxable interest income this year, ask yourself the question: Do I hold any equities inside my registered plans?
If so, perhaps you should adjust the location of your interest-bearing investments so that they are held in your registered plans where the interest income will be sheltered from tax. Your equities can be held outside your registered plans where you can claim capital losses if they arise, and where taxable capital gains won't hurt much from a tax perspective relative to interest income. Consider making adjustments going into 2010.
Trigger accrued losses before year-end If you have realized capital gains this year, or in one of the three prior years, consider selling any investments that have dropped in value in order to apply the capital loss against those capital gains. Capital losses must be used to offset gains in the current year first, but excess losses can then be carried back up to three years or forward indefinitely.
Time the purchase of certain investments If you're planning to invest in an interest-bearing security (like a guaranteed investment certificate) that has a maturity of one year or longer, consider waiting until 2010 before making the investment. By waiting, you won't have to pay tax on any accrued interest until 2011 - the year of the first anniversary of the investment.
Also, consider waiting until early in 2010 to purchase any mutual funds that are expected to make taxable distributions before the end of 2009. You'd hate to pay tax sooner than necessary.
Close out option contracts with losses If you close out option contracts with accrued capital losses before year-end, you'll be able to utilize those losses to offset realized capital gains this year, or in 2006, 2007 or 2008.
Trigger capital gains where appropriate It can make sense to trigger a capital gain before year-end if the capital gain won't result in a tax bill. If, for example, you have capital losses to use up, or where the capital gain will be taxed in the hands of someone with little or no other income (in-trust accounts for children come to mind), then triggering the gain and reinvesting the proceeds will allow you to create a new adjusted cost base (ACB) in the investment without triggering a significant tax liability. That new ACB will be higher than the current ACB, which will save you tax when you make an ultimate sale later.
Defer capital gains where appropriate So, you're thinking of selling an asset for a profit and the transaction is going to give rise to a tax liability. Think about delaying that sale until after Dec. 31, 2009 to defer the tax until 2010. In fact, the taxes owed would not be payable until April, 2011 when you file your tax return for 2010.
Next week I'll continue this discussion with more strategies to consider in the next few weeks to save tax for 2009 and beyond.