Last Minute Tax Savings (WSJ)

The 10 Money Moves to Consider Before 2010 Expires Did You Give Holiday Gifts to Co-Workers? You Might Be in Luck on Taxes.

By JENNIFER OPENSHAW

New Year's Eve is almost here, but don't let that stop you from making some important money moves now, before Dec. 31, so you can reap the benefits in 2011.

Michael Casey says that with New Year's Eve almost here, you will want to consider these important money moves before year end to reap benefits in 2011.
.1) Take investment losses. The end of the year is a great time to review your portfolio and your asset allocation. If you have a dog of a stock or mutual fund that you want to eliminate, it is often a good idea to do it by Dec. 31.

The losses you take can offset the gains you have realized on other stocks or funds and help reduce your tax bill.

For example, say you sold your Apple stock and made $10,000. But you have a poor-performing fund relative to other options that, if you sold it, would result in a $5,000 loss. When taken together, the losses from selling leave you with a net taxable gain of $5,000, far less than had you not sold the investment dog.

2) Max-out your retirement accounts. Many companies have reinstated their 401(k) matching contribution after wiping it out during the recession. But even if not, your 401(k) is still one of your top savings vehicles, and you should fund it as much as possible by year-end. The maximum contribution in 2010 is $16,500 plus $5,500 for those 50 and older.

3) Check your paycheck withholding. The new tax law means your take-home pay next year likely will be higher, thanks to lower Social Security taxes, which for most workers will be cut to 4.2%, from 6.2% now.

So, make sure you aren't having too much or too little withheld. Too much means Uncle Sam is earning interest on your money (though you will get a refund) and too little means you will have a tax bill.

While it is always a good idea to review your withholding annually, the new changes make it even more important. You should also review your withholding if you are an individual or couple with multiple jobs, are having children, getting married, getting divorced or buying a home, or are someone who typically winds up with a large refund at the end of the year.

4) Deduct holiday gifts up to $25 for business. Did you give any holiday gifts to co-workers, vendors, or prospective customers or partners? If so, you will want to keep those receipts since you will be able to deduct up to $25 for such gifts.

This means the $25 for those gourmet chocolate pretzels or toward tickets to the theater would actually run you about $17 out-of-pocket, depending on your tax bracket.
Also, you will want to include anything deductible for your holiday party so long as it had a business purpose.

5) Give to a relative and reduce your tax bill. We have written before about all the ways grandparents or simply those who have some extra wealth can help others, especially someone trying to close the college funding gap.

Give the gift of education or something else worthwhile while you are alive and you will not only reduce your taxable estate, but you will enjoy seeing it put to use.

You can give up to $13,000 a year to someone if you are single ($26,000 if married) without facing gift taxes. If you contribute to a "529" college-savings plan, however, you can front-load your gifting and give up to five times that amount in one year—that is $130,000 if you are a couple—without facing a gift tax. Nice.

6) Donate to a charity. 'Tis the season to give, and if you have been one of the lucky ones who did better financially than you expected, maybe you are up for sharing more of it. You can give cash or stock to a charity, but what's better?

If the stock is worth more than you bought it for, you are usually better off donating it to charity instead of selling it. That allows you to avoid the capital-gains tax on the profit. For example, say you bought 100 shares of a stock at $10 per share and they are now worth $30 per share.

If you donate the stock to charity, you won't have to pay the capital-gains tax on the $2,000 in profit. If you have had the stock for at least a year, you will also be able to deduct the fair-market value of it on your taxes, as long as you itemize.

On the flip side, if the value of the stock is less than you bought it for, you will probably want to cash it first so you can deduct the loss.

Of course, donating money is usually deductible (as long as you itemize). And if you are donating your services, remember that only mileage, not your time, is deductible.

7) Make an estimated tax payment early. If you didn't pay enough to the federal government last year, you may face an even bigger tax bill come April 15. For instance, maybe you didn't have enough taxes withheld from your paycheck or you made a chunk of money on an investment. If you pay estimated taxes, consider paying by Dec. 31.

8) Pay January's mortgage in December. Similarly, making a mortgage payment early will increase your mortgage deduction for 2010.

Perhaps all the talk about possibly eliminating this valuable deduction might spur you to move on this one.

9) Enroll in your employer's flexible-spending account. These accounts allow you to sock away up to $5,000 (the maximum amount varies by employer) on a pretax basis, much like a 401(k), to cover out-of-pocket health-care costs. Also, find out whether your employer offers a similar benefit for child-care expenses.

Open enrollment is typically the only time to make changes to your plan and that is usually in November. However, you may be able to make changes if you have experienced a "qualifying life event," such as a marriage or divorce, a new child, a change in your employment or you go on family medical leave.

10) Contribute to your IRA. While you have until April 15 to fund your IRA, whether a Roth or traditional, getting it done before then will leave you with one less thing to worry about.

At a minimum, get the paperwork done to open an account if you don't have one already. The maximum you can contribute is $5,000 and an additional $1,000 for over-50 retirement savers for a total of $6,000. And don't forget your nonworking spouse—you can save for him or her, too.

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What is going on with municipal bonds? The End of BABs (Build America Bonds) (from WSJ)

Muni Bonds Continue to Tumble
A Rush to Sell Build America Bonds Before They Are Gone.

By Romy Varghese and Kelly Nolan
Of DOW JONES NEWSWIRES

Prices of municipal bonds fell sharply for the second day Tuesday, driving yields on long-term bonds to the highest points in more than 18 months, as investors worried about the impact of the end of a federally subsidized borrowing program.

The yield on a closely watched index of high-grade, tax-exempt 30-year muni bonds rose to 4.84%, its highest level since March 2009, according to Thomson Reuters Municipal Market Data. The yield on 10-year bonds climbed to 3.24%, the highest since June 2009. Yields move inversely to prices.

.The market took a hit Monday as well, as the expiration of the Build America Bond program by the end of the year looked increasingly likely.

An extension of the program, which provides a 35% interest-rate subsidy from the federal government on taxable bonds issued by municipalities, on Monday wasn't included in legislation introduced in the U.S. Senate that continues Bush-era tax cuts.

Since the government started the BAB program in April 2009 as part of its economic stimulus, more than $165 billion of these bonds have been sold, accounting for about 22% of all new municipal debt, according to data from the U.S. Treasury Department.

Many municipal-bond market participants expect that, without BABs, state and local governments will issue more tax-exempt bonds next year and may overwhelm investor demand for that debt. This would force states and cities to raise their rates to attract buyers.

About $100 billion in long-term tax-exempt bonds would return to the market next year, estimated Robert Nelson, managing analyst at Municipal Market Data.

"With the loss of leveraged buyers of municipal bonds in 2008, there has been a dearth of demand for long maturity munis--this is where BABs came in and diverted this issuance to the taxable market," Nelson said. "Now without BABs the market is left to deal with the same supply/demand imbalance that plagued munis in 2008 and early 2009."

He added that long-term yields have generally returned to the same level seen at the outset of the Build America Bond program last year.

States with some of the lowest credit ratings have been especially battered by the recent muni-market turmoil.

The spreads on Illinois 10-year maturity general obligation bonds grew from 1.60 to 1.90 percentage points from Nov. 1 through Monday above a benchmark triple-A bond with the same maturity, according to Municipal Market Data.

Spreads on California general obligation bonds increased from 0.97 to 1.30 percentage points over the same time frame.

Meanwhile, municipal borrowers are plowing into the market with BAB deals in the last few market days of the year.

"We are hitting the market as quickly as we can because it's only going to get worse," said Harold Downs, treasurer of the Metropolitan Water Reclamation District of Greater Chicago.

Because of the market conditions, the water district is shrinking the size of its bond sale this week from $500 million to $280 million, he said. Most of the offering is BABs.

The Metropolitan Water District of Southern California is planning to sell $250 million in BABs this week, moving up part of a $450 million deal it had originally scheduled for the spring, said Brian Thomas, the water district's assistant general manager and chief financial officer.

"I think the market is still favorable if you look back over the last 10 years, but if you look compared to a month ago, it's a much more difficult market," Mr. Thomas said.

Higher yields may ultimately help stabilize the market by attracting buyers, said Dan Solender, director of municipal bond management at investment firm Lord Abbett in Jersey City.

And amid the volatility, some analysts are encouraging investors to buy municipal bonds from creditworthy issuers. Munis are now offering higher yields than U.S. Treasurys of comparable duration, which is the inverse of the usual relationship, noted Dan Loughran, senior portfolio manager at OppenheimerFunds. "Prices in the municipal bond market may continue to be volatile in the near term, but we believe relief is likely waiting in the wings once the New Year gets underway," he wrote in a report.

—Jeannette Neumann contributed to this article.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com