Some savvy year-end tax moves

From: Fidelity Viewpoints

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.

Here are some strategies that may potentially lower your tax bill and help improve your tax picture for future years.

1. 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.

2. Max out your tax-advantaged retirement accounts

A simple yet potentially powerful way to lower your tax bill and save for retirement is to max out your tax-advantaged retirement accounts—such as a 401(k) plan, 403(b) plan, or IRA. Contributions generally are not included in your taxable income for the year, meaning that your tax liability could be reduced by your marginal tax rate, multiplied by the amount of your contributions—for example, 28 cents on the dollar if you’re in the 28% tax bracket.

The 401(k) plan contribution limit for 2011 is $16,500, which could translate into a $4,620 current-year tax savings if you’re in the 28% bracket. And, if you reach age 50 before the end of the year, you can kick in another $5,500 as a “catch-up” contribution. The ability to contribute at this level depends on your income and plan contribution rules.

For IRAs, the contribution limit for the year is $5,000, or $6,000 if you’re 50 or older in 2011. You don’t have to make a contribution before the end of the calendar year, as you do with a workplace savings plan. You can contribute to an IRA for 2011 right up until the tax-filing deadline of Monday, April 16, 2012. Remember, there are income restrictions for deductible contributions into an IRA. The deduction phaseout starts at $90,000 of modified adjusted gross income (MAGI) for couples filing jointly and $56,000 for single filers. And don’t forget about low-cost, tax-deferred annuities as another option because, unlike an IRA or 401(k) plan, there are no annual contribution limits.

3. Consider 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).

4. Consider contributing to charity

Contributions to public charities can be an attractive strategy for reducing taxes. The amount of your deduction for charitable contributions is limited to 50% of your AGI, and may be limited to 30% or 20% of your AGI, depending on the type of property you give and the type of organization you give it to.

5. 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).

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

Taking a tax-efficient approach to investing can be a smart move, but the real keys to potential success are staying disciplined and having a big-picture perspective. These are just some potential tax strategies to help you manage your financial life more efficiently. Depending on your individual situation, there may be other strategies to help provide even greater tax savings. Be sure to ask your tax professional for more information.