Tax Strategies for Year's End 

Do you hear the words “income tax” and think, “Didn’t I just file my 2007 return?” It may be hard to believe, but tax time will be here again before you know it. Planning how to minimize your tax bite should be a priority.

When it comes to income taxes, lower is definitely better. So you may want to take some time before year-end to estimate how much federal income tax you’ll owe for 2008. Then, see if some of the tried-and-true strategies below may help you reduce your tax liability.

Time Your Investment Sales.

Taking your profits on a stock may be a good income-tax move, but only if you’ve held the investment for a while. Gains on investments held longer than one year generally qualify for favorable long-term capital gains tax rates. For investors in a marginal tax bracket of 25% or higher, long-term capital gains are currently taxed at a 15% rate, while gains on investments held for one year or less are taxed as short-term capital gain at your regular income-tax rate. For the 2008 tax year, the long-term capital gains rate is 0% for taxpayers in the 10% and 15% marginal tax brackets.

Cut Your Losers Loose.

A quick review of your portfolio might turn up investments that have lost value since you acquired them. If their future prospects look bleak as well, you may want to consider selling and taking the loss. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses that you can’t deduct for 2008 can be carried over for deduction in future years, subject to the same limitations.

Don’t make taxes your only reason for holding or selling an investment. Weigh all factors and talk to your financial professional before you make a decision.

Ramp Up Your Retirement Account.

Increasing the amount of any pretax contributions you make to an employer’s retirement plan can lower your tax bill. The sooner you begin saving more, the greater your tax savings will be.

Try a Traditional IRA.

If you put money into a traditional individual retirement account by April 15, 2009, you may be able to deduct all or a portion of your contributions on your 2008 tax return. The contribution limit for 2008 is $5,000 — $6,000 if you’re age 50 or older. Your advisor can fill you in on the deduction requirements.

Plan Ahead.