Year-End Moves Can Net Tax-Time Payoff

It may not be as much fun as holiday shopping, but making a few bookkeeping maneuvers in the final weeks of 2005 could prove far more rewarding. Financial experts say that last-minute planning can net hundreds of dollars in tax savings early next year, when you may need the dough to pay all those holiday bills.

Here are a few ideas:

* Weed out your investments. If you have mutual funds, you might have taxable capital gains regardless of whether you’ve sold shares or reaped a cash windfall. That’s because profits earned by mutual funds are “passed through” to investors as taxable income, even when the profit is reinvested and never leaves the fund. Many fund companies have already notified their shareholders that 2005 will be a big year for these pass-throughs, said Philip J. Holthouse, a partner at Santa Monica tax law and accounting firm Holthouse Carlin & Van Trigt.

The best way to cut the tax hit on those gains is to get rid of money-losing investments to trigger offsetting losses, he said. Although it never makes sense to sell a stock you want to keep just to claim a tax loss, now is a good time of year to weed out investment mistakes.

While you’re at it, it may make sense to reconsider the types of investments held in taxable portfolios, said Juliet Der Avanessian, tax manager at Rothstein & Kass in Beverly Hills. That’s because interest income is taxed at ordinary income tax rates as high as 35%, whereas dividends and capital gains are taxed at a maximum rate of 15%. Moving money from bonds and CDs into dividend-paying stocks won’t help save money this tax year, but it could save substantial sums down the line, she said.

Also, if you had more losses than gains in past tax years, don’t forget that you can use those “carried over” losses to reduce investment gains in 2005 and beyond. If, after all your carry-overs, you still have more losses than gains, up to $3,000 in investment losses can be deducted from ordinary income each year.

* Donate items to charity. December is also an ideal time to clean out cupboards and attics for little-used items that you can give to charity. Such items can be deducted at their fair market value or their cost, whichever is less.

But a few words of caution: If you donate more than $500 of used goods in a single year, be sure to keep records of what you gave and how it was valued. The IRS is cracking down on taxpayers who exaggerate the value of their in-kind contributions. Any individual item worth more than $5,000 requires a professional appraisal.

Be particularly wary of giving a car, Der Avanessian said. There were so many abuses with valuing automobile deductions that Congress revamped the law. Now, if the charity sells a donated car, the donor’s deduction is limited to the gross proceeds that the charity received, even if that’s a fraction of what the donor thinks the car is worth.

* Think “alternative” gifts. Looking for the perfect gift for the guy or girl who has everything? What about a goat? OK, it won’t go to your fortunate friend or relative -- it will go to a needy family instead. But charities such as World Vision (www.worldvision.org); Mercy Corps (www.mercycorps.org) and Habitat for Humanity (www.habitat.org) will send your friend a nice thank-you card, noting that you bought a goat or school supplies or a kitchen sink in honor of your friend or relative. The honoree gets the warm glow of giving, while you get credit for a clever gift -- and the tax deduction.

* Shop for deductibles. Teachers who spend some of their own money on school supplies may want to ensure that they’ve spent at least $250 on those purchases this year. That’s because schoolteachers qualify for a special write-off for such expenses in 2005. That deduction expires at year end, and it’s unclear whether it will be reinstated, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Those who need to renew deductible subscriptions, pay professional dues or buy new uniforms should calculate whether such business-related expenses will top 2% of adjusted gross income. If not, procrastinate. Miscellaneous expenses under that threshold can’t be deducted. So, if you postpone your business-related expenses until January, you could bunch two years’ worth of deductible costs into one tax year. That boosts the chance of exceeding the limit.

* Speed up interest and tax payments. If you want to deduct the interest on your January mortgage payment or home equity loan, you’ve got to write those checks in December, Holthouse reminds. It’s not enough that the interest has accrued; it has to be paid to be deductible.

In some cases, it might also make sense to prepay next year’s property tax installment to get the write-off this year rather than next. But upper-income taxpayers should check with a tax advisor first. That’s because the so-called alternative minimum tax, which hits people earning more than about $100,000 annually, can take away the deductions for this otherwise viable write-off.

Unfortunately, the alternative minimum tax is complex enough that most taxpayers would require the help of software or an accountant to figure out whether they’d be affected by it.

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.