Ahead of the Curve
Taking Tax Advantages Before the Rebound

David Shaughnessy at Ketner/Shaughnessy Photography was nice enough to do my head shot for this article. He asked me what I was writing about. I told him, "Analyzing your portfolio from a tax standpoint in a recessionary economy." His response indicated that perhaps portfolio analysis was not at the top of his priority list. I explained to him it was much like his job—I want him to make me look like Elizabeth Hurley, but I understand he has to work with what he’s got. That pretty much sums up this article. Lucky for you, you have things to work with:

1. Know your tax laws. The last few years have been big in tax reform with lots of benefits to those who are trying to save for both college and retirement. Tax-free growth of Roth IRAs for retirement money and 529 Plans for college are two great ways for you save. Note that Roth IRAs have income limits placed upon them. 529 Plans can be great also for grandparents trying to pass money out of their estate to their grandkids—while retaining control.

Last year, there were also radical changes in qualified plans, allowing much larger contribution limits—including "catch-up contributions" for those over 50. This is a strong message from Congress saying, "Attention Baby Boomers: You Haven’t Saved Enough, and We’ll Do All We Can to Help You Save More!" This is worth the time to research it, especially if you own a business, are self-employed, or even have consulting income. Diversify from a tax standpoint, not just an allocation standpoint.

2. Offset capital gains with capital losses. A downturn in the market can be the best time to liquidate taxable gains, because you can offset them with losses and pay less in taxes. What an opportunity! This can be especially good if you are thinking about reallocating a portfolio to make it more conservative or more aggressive, or if you want to change asset class altogether—to go from stocks to rental real estate, for example. It is also a plus if you are moving from single stocks to more diversified investments, such as mutual funds, or tax-deferred investments, such as annuities. (Hint: Remember the goal behind your investment before changing any of your investments!

3. Understand the benefits of giving. Want to get volatile assets out of your estate and into the hands of your beneficiaries? Gift them now, and let your beneficiaries benefit and pay income taxes on future growth. Chances are, they’ll be in a lower income-tax bracket. There is no better time to transfer property to noncharitable beneficiaries than when the property value is down, but will probably come back up.

4. Charitable giving may be a great idea. Not every asset is down now; real estate in particular is doing quite well. You can use a foundation to set up a charitable fund for you with your highly appreciated real estate (or almost any other asset). This will allow you to get great tax breaks and have their research and support to maximize the values of the dollars you put into the community. They can also help you transfer closely held corporate stock to your beneficiaries—and now might be a good time for that as well.

5. Get help. After the ice storm, the last thing you would have seen me doing is climbing my tree with a chain saw. I called a professional. I don’t do my own legal work, my own taxes or even make my own clothes. Don’t risk a lot for a little.

Stephanie Guerin is a Certified Financial Planner at KCL Financial Group in Kansas City, Mo. She can be reached by phone at 816.960.1290, ext. 108, or by e-mail at sguerin@kclfg.com. Securities and Investment Advisory Services offered through Sunset Financial Services, Inc., 3520 Broadway, Kansas City, Mo. 64111, 816.753.7000 (OSJ). Member NASD/SIPC.