Tax Guide: Tax Strategies for Everyone

Consider donating before July 1, 1998 appreciated stock to a private foundation. Before that date, you can deduct the full fair market value gift (up to the regular percentage of income of such a limitations). This tax break is scheduled to expire on June 30, 1998. You need to have a private foundation in place in order to take advantage of this deduction, and setting up a private foundation cannot be done overnight. Plan ahead to have your private foundation in place before July 1, 1998.

Maximize the amount of interest you can deduct. There are significant restrictions on the types of interest expense that are tax deductible. Some examples of deductible interest expense are most home mortgage interest (subject to limitations), investment interest (also subject to limitations), and interest related to a trade or business. Personal interest, including interest on credit cards, car loans, and tax deficiencies, is not deductible. Analyze your borrowings and restructure debt where possible to gain a tax deduction.

Don't sell appreciated assets to fund charitable gifts. Both you and a charity can benefit if you give appreciated assets to the charity instead of selling the assets and donating the after-tax proceeds. The amount of the savings (which can be significant) will depend on how much capital gains tax you would have paid on the sale. For example, suppose you are in the 39.6% bracket and plan to make a charitable gift of appreciated securities worth $100,000 with a cost of $40,000. You must choose between gifting the securities outright or selling the securities and gifting the cash proceeds. The gift of stock allows you to permanently avoid $12,000 of tax on the appreciation ($60,000 appreciation 20% capital gains tax rate).

Look for the double-shelter opportunity in some passive gains. The rules essentially provide that you cannot use real estate and other tax shelter losses to offset wages, interest, dividends, and gains from stock market investments. Passive losses can only be used to offset passive income in most situations. The result is that many taxpayers have "suspended passive losses" that they carry forward from year to year. These passive losses can be valuable if you have passive income or dispose of a passive activity, and their use should be maximized.

One common situation involving real estate is the sale of the property and the recognition of capital gains, which may or may not be accompanied by the receipt of cash. These capital gains can be offset by both capital losses and passive losses (including losses from other passive activities). In effect, one gain allows two losses.

For example, assume that you sell real estate, that the sale generates a capital gain of $10,000, and that you have carried forward passive losses from earlier years totaling $10,000. If you do nothing, your capital gain will be sheltered by the passive loss carryforward, and the transaction will have no net effect on your taxable income. If, however, your stock portfolio also has a $10,000 capital loss in it, the capital gain related to the disposition of the real estate presents an opportunity. You can dispose of the appropriate stock and realize the capital loss, which will offset the real estate capital gain, and then use the passive loss carryforward to shelter other ordinary income. The net result is a reduction in current taxable income of $10,000.