It’s that time of year – when all the personal finance magazines, newspapers and blogs compile their tax tips. But are they really as smart as they seem?
Let’s take this list for example.
The first topic is the first-time home-buyer credit (now expanded to include non-first timers). Now, I completely agree this is a great benefit if you qualify. But, don’t rush out and buy a home just to take advantage of this. Buying a home is probably the largest financial transaction anyone will make and it should be given great thought. The personal finance blog Get Rich Slowly has a column about this very topic.
(Same goes for their “new car purchases” advice. Don’t just rush out and buy a car, like so many did under Cash for Clunkers, to take advantage of a
Next on the agenda is the ever popular capital loss harvesting. Every tax tip column I’ve ever read includes this gem. However, it’s not always the right thing to do. Here’s a couple examples:
War N. Buffet has a stock that isn’t doing so great, he’s down about $5,000 from his original purchase a few years ago. If he sells, he can deduct $3,000 of that loss against his other income – wages, interest, dividends, etc. assuming he has no other capital gains/losses. Great deal, right?
Not so fast. What if good ol’ War only makes $30k this year (maybe due to a layoff), but expects to double that next year? If he takes the loss in 2009, he’ll save 15% in federal tax. But if he waits another 2 months and sells in 2010, he’ll jump up another 10% since the higher income puts him in the 25% marginal bracket.
What if he has other capital gains? The loss would then offset those first, then he could deduct up to $3,000 against other income. So if he had $2,000 gain elsewhere, he could deduct the full $5,000. But – it might be better to go ahead and pay tax on the gain at the lower long-term rates (currently 0% and 15% depending on your income), then take the loss next year.
It’s complicated right? That’s why it’s important to take this advice with a grain of salt and make sure it applies to your situation rather than just diving in and potentially costing yourself hundreds or thousands in overpaid tax. Get a CPA involved if it’s too overwhelming, a hour long consultation probably won’t cost you over $100 (my rate is $85/hr) but could save much more than that.
2 responses so far ↓
Doctor Stock // December 12, 2009 at 1:56 pm |
Even for those who think they can do it alone, it is always good ever few years to invest an hour or two for a review and ideas.
Kevin // December 15, 2009 at 4:14 pm |
Thanks for the comment, Doc. I agree that running your ideas past another set of eyes is usually not a bad idea.