Mellody's Math: If you bought $500 worth of stock several years ago that is now valued at $1,500 and sold it, you would owe $200 in capital gains (20 percent of your $1,000 gain). If after selling the stock you donate the $1,300 after-tax profit to your favorite charity, you would shave $403 off your income taxes (assuming a tax rate of 31%) for a net tax savings of $203 after the capital gains tax that you already paid is taken into consideration. However, if you donate the fully appreciated stock instead of selling it and donating the after-tax proceeds, you not only avoid paying a $200 capital gain tax, you will also be able to deduct the full value of the donated shares-$1,500-instead of just $1,300. In total, your taxes would be reduced $465.
It is worth noting that donations to charity can be given in forms other than money or securities. For example, do your spring-cleaning this December and donate those clothes that are just sitting on hangers. Or if you purchased a new computer this holiday season, consider donating your old one to a school or charitable organization. Not only will a needy organization benefit, you will also get a tax break.
6. Convert to a Roth IRA: In a traditional IRA, you have until April 15 to make deductible 2001 contributions. If you are in a qualified tax bracket, contributions made to your IRA are tax-deductible. Even if the contribution is not deductible in your tax bracket, you will benefit from having your money compound longer — tax deferred.
If your gross income is $100,000 or less, consider converting your regular IRA to a Roth IRA. Although you have to pay income tax on the amount you convert (from a regular IRA), in light of this year's market decline, a lower balance makes for a lower tax bill. With a Roth IRA, when you retire, all of your withdrawals will be tax-free.
7. For Now, Don't Touch College Savings Plans: As of January 2002, all distributions from 529 college savings plans are exempt from federal taxes if used for qualified educational expenses like tuition. If you tap into the plan before 2002, earnings will be taxed at the child's tax rate of 15 percent.
Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, Ariel Mutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributed to this report.