End of the Year

As the end of the year approaches, your mission as a tax strategist is to minimize your tax.
There are three basic steps:

1. Decide whether your tax bracket will probably be higher this year or next year.
2. Arrange to receive as much of your income as possible in the year of the lower bracket-when it will be taxed less.
3. Arrange to pay as many expenses as possible in the year of the higher bracket-so that your deductions will be larger.

In evaluating your investment portfolio, it can be helpful to construct a new portfolio of the securities you would buy today if you were starting over with cash. Then you can use tax strategies to shift the portfolio you have toward the one you want. Here are some strategies to consider.

If you have not yet realized capital gains or losses this year and have unrealized capital losses in your portfolio, consider establishing a loss to offset ordinary income. Losses can be applied against ordinary income dollar-for-dollar up to the yearly $3,000 limit. (Excess losses can be carried forward indefinitely.) If your realized capital gains exceed your realized capital losses, you may want to sell any remaining loss property to offset the excess gains. If you expect a stock with an unrealized loss to underperform the market in the months ahead, you can sell the stock, establishing the loss, and use the proceeds to buy another stock with more favorable prospects. If you believe the long-term prospects for a stock are favorable, but expect tax-loss selling to keep the price low through the end of the year, you can sell the stock, establishing the loss, and then repurchase it-but not earlier than the 31st day following the sale, or the loss will be disallowed.

If you plan to give to certain charities this year and next year, you may want to bunch the contributions into the year when your tax bracket (and therefore your deduction) will be higher.

If you receive a lump-sum distribution from a qualified retirement plan or an Individual Retirement Account (IRA), you may roll over the distribution into another qualified plan or IRA and avoid current taxation. There is a mandatory withholding requirement on lump-sum distributions from qualified plans (but not IRAs) that are paid to the account owner. Your employer must withhold 20% of the taxable part of the distribution. This is particularly unfortunate if you plan to roll over the distribution in order to defer the tax. You can avoid the withholding requirement by arranging with your employer for a direct transfer from the retirement plan to an IRA.

If your employer's retirement plan includes a 401(k) feature, it can serve the same function as the old fully-deductible IRA. If your IRA is no longer fully deductible, you may be able to make up for it by contributing more to your 401(k) plan. The advantage of IRAs is that contributions for this year can be made until the deadline (without extensions) for filing your tax return for this year.

These are only a few of the ideas that can help you minimize your taxes. Consult your tax advisor on what transactions should be made in time for this year's reporting. For a review of your portfolio and help in choosing specific investment strategies, talk with your financial consultant.

ENB Associates Inc. is a wholly owned subsidiary of Evans National Bank. Securities are offered by O'Keefe Shaw & Co., Inc. Member NASD, and SIPC. Products purchased through O'Keefe Shaw may lose value, are not deposits with obligations of, or guaranteed by Evans National Bank or affiliates and are not insured by the FDIC.