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February, 2009 Tax Tip

Use the Stock Market Slump to Your Advantage


While 2008 was a disastrous year on Wall Street, the good news is that it has provided some opportunities for tax reduction.  The following are some examples:


Stocks that have been held for a long time or were inherited may still have paper gains.  If you take these gains this year, you can use loss carryovers from prior years or current year losses to offset the gains.  You can immediately repurchase the stocks you sell at gains and obtain a higher tax basis.  Remember, the 30-day “wash sale” rule applies only to sales at losses, not gains. 


Make gifts of depressed stocks to your children.  In 2009 you can give up to $13,000 per donee without paying tax or filing a gift tax return.  This removes the value of the stock from your estate and, therefore, is a good way to pass on wealth.  The lower value means you can give more shares away now than you could before.  These shares are likely to be more valuable in the future when the market rebounds.  Note: Be mindful of the “kiddie” tax on dividends paid on the stock if your child has not attained a certain age, generally 18.


Consider converting a regular IRA to a Roth IRA.  You will pay less tax on the conversion because the value of your IRA has decreased.  The value of your IRA is included in income in the year of conversion, but later withdrawals from the Roth will be tax free, whereas all withdrawals from a regular IRA are generally taxed.  Individuals and couples with modified adjusted gross income of under $100,000 can do a conversion in 2009.  The $100,000 limit is eliminated in tax years beginning after 2009, thereby allowing higher income taxpayers to convert a regular IRA into a Roth IRA.


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