Mellody's Math: Last Minute Tax Tips For 2001

Assets held for one year or less are considered short-term and assets held for more than a year are considered long-term. Short-term gains are taxed at your marginal income tax rate, which can run as high as 39.1 percent, whereas long-term gains are taxed at 20 percent or 10 percent depending on your income. In an optimal situation, you want long-term gains and short-term losses. If you have more losers in your portfolio than winners, you may deduct up to $3,000 of losses against your ordinary income each calendar year until all losses are fully "spent."

Mellody's Math: Here are two examples that can help you understand why.

Example 1: Assume you have a short-term gain of $10,000, a long-term gain of $10,000 and a $9,000 short-term loss. When you net your short-term gains and losses, you realize a $1,000 short-term gain and a $10,000 long-term gain.

The short-term gain is taxed at up to 39.1 percent and the long-term gain is taxed at a maximum of 20 percent. On the flip side, if you have a $10,000 short-term gain, $10,000 long-term gain and $9,000 long-term loss, you end up with a $10,000 short-term gain and a $1,000 long-term gain. In this scenario, you are forced to pay more in taxes-up to 39.1 percent of $10,000 instead of 39.1 percent on the $1,000 if you exercised the loss before or on the one-year anniversary of your purchase of the securities. The Moral: Consider taking short-term losses before they become long-term to offset any gains.

Example 2: Assume you have a short-term gain of $10,000, a long-term gain of $10,000 and a short-term loss of $35,000. Net the short-term gain and loss to realize a $25,000 short loss. Offset this loss with the $10,000 long-term gain which leaves a $15,000 net short-term loss. You may use $3,000 this year and carry forward the remaining $12,000 loss to offset short-term gains first then long-term gains in future years. As always, you want to eliminate the short-term gains first, then apply the losses to any future gains.

5. To Give Is Divine: Contributions to charities are fully deductible if you itemize them on your tax forms. Americans have reportedly donated an estimated $1.3 billion to non-profit organizations providing aid for those affected by the Sept. 11 attacks. As a result, many other charities have been left in the cold, making your year-end donation all the more meaningful. In lieu of cash, you can also donate appreciated stock or mutual fund shares before the close of 2001. If you have owned the shares for more than one year, you can deduct the full market value on the date of the gift, and avoid paying capital gains taxes on the appreciation, saving you money. The maximum deductible contribution allowed is 50 percent of your adjusted gross income (AGI). The 50 percent rule applies to most contributions, but it may be lower for contributions to certain organizations or for certain kinds of contributions.

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