As the year draws to a close, Consumer Reports Money Adviser's experts think you should take time out from gift shopping and party hopping to make a few tax moves that will save you money when you file your 2011 return next year.
*Take losses: Selling stocks, bonds or funds at a loss has several tax advantages. Capital losses can offset any capital gains you've taken this year, reducing or eliminating the tax liability.
Losses can also trim the tax you'll owe on capital-gains distributions from mutual funds. And if your capital losses exceed your capital gains, you can deduct up to $3,000 in net losses from your ordinary income, thus lowering your tax bill for 2011. Losses of more than $3,000 can be carried over to future years with no limit.
Remember that you can't take a capital loss right away if you immediately buy back what you sold. If you do, the loss will be included in your basis in the repurchased security, reducing the tax on a future sale.
If you want to maintain your investment strategy yet nail down a capital loss for this year, you can either buy something similar right away or wait more than 30 days and then buy back what you sold.
*Give away gains: If you want to make a year-end charitable donation, consider giving appreciated securities that you've held in a taxable account for more than one year.
Say you want to give $5,000 to a tax-exempt charity. You have $5,000 worth of fund shares you bought years ago for $2,400. Those shares are worth only $4,610 to you because selling them would generate a 15 percent tax on the $2,600 long-term capital gain, or $390.
If you donate the shares, you'll get a $5,000 deduction and the charity can keep the entire amount after a sale. The process can take a few weeks, so if you missed the boat this year, just start planning ahead for 2012.
*Convert your IRA: When you convert a traditional IRA to a Roth IRA, you're exchanging a tax-deferred account for one that eventually will be tax free. After five years and age 59 1/2 , all Roth IRA withdrawals avoid income tax. But you must pay tax on the amount you convert.
After the recent market setbacks, there's a good chance your traditional IRA has lost value, making a conversion less taxing. If you convert anytime in 2011, the five-year clock for tax-free withdrawals starts Jan. 1, 2011. What's more, you can reverse all or part of a 2011 Roth IRA conversion until Oct. 15, 2012, if your investments lose value after the conversion.
*Don't forget IRA distributions: If you're older than 70 1/2 , you generally must take required minimum distributions (RMDs) from your traditional IRA and from company plans such as 401(k)s. Take less than the required amount and you'll owe a 50 percent penalty on the shortfall.
Taxpayers who reach 70 1/2 in 2011 have another decision to make at year's end. Technically, you don't have to start RMDs until April 1, 2012. But you'll have to take a second RMD by Dec. 31, 2012, and by every Dec. 31 afterward. You might prefer to take the first one by the end of 2011 to avoid piling up two RMDs in 2012, which could push you into a higher tax bracket.
In 2011, taxpayers over age 70 1/2 can make charitable contributions of up to $100,000 from their IRA. You won't get a tax deduction for the donation, but you can satisfy your RMD obligation without owing tax on the distribution.
By the editors of Consumer Reports at www.consumerreports.org.