Some more year-end tax moves

Although it’s been a volatile year for stock markets, it doesn’t mean your tax picture has to suffer. By taking advantage of some strategies before the end of the year, you could potentially find yourself with a smaller tax bill next April.

Consider tax-loss harvesting

Tax-loss harvesting is the process of selling investments that have lost value in order to offset any capital gains you realized during the year. This may be a strategy to consider using this year due to the stock market’s turbulent performance. If you end up with more losses than gains, you can use the remaining losses to offset ordinary income up to $3,000. If you still have excess losses, you can carry them over to offset capital gains and ordinary income in future years.

Itemizing deductions and delaying income

By bunching deductions in the current year and pushing income into next year, you may be able to lower your 2011 tax bill. Among the candidates for deduction bunching are charitable contributions, elective surgery, and unreimbursed work expenses, such as travel, professional education, or uniforms. Keep in mind that you can only deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI), and miscellaneous expenses, as defined by the IRS in Publication 529, above 2% of AGI.

On the income side, you could consider delaying payment for freelance or self-employment work, or asking your company to defer any year-end bonus, until the new year begins.

To make this strategy work, you will need to itemize your deductions when filing taxes rather than take the standard deduction ($11,600 for joint filers and $5,800 for single filers). Keep in mind that this strategy may not be effective if you’re subject to the alternative minimum tax (AMT). And you may not want to pursue it if you expect Congress to increase tax rates for 2012, or if you think the additional income could push you into a higher tax bracket next year.

Consider opening a 529 college savings plan

A 529 College Savings Plan is a tax-advantaged vehicle for putting aside money for the education of a child, grandchild, or loved one.

You can contribute up to $13,000 ($26,000 per married couple) per beneficiary, per year, without incurring federal gift tax, and the contributions are generally considered to be removed from your estate, even though you retain control over the distribution of the funds. For an accelerated transfer, you can contribute up to $65,000 ($130,000 per married couple).⁴

Any earnings are tax deferred, and withdrawals are tax free if they’re used to pay for qualified higher education expenses of the beneficiary.