One of the best tax deductions is a donation to charity.

There is a saying that heating with wood warms you twice:  once when you chop the wood, and once when you burn it.  Similarly, a donation to charity makes you feel good for supporting a worthwhile cause, and it puts a little lettuce back in your wallet.

Unfortunately, charitable donations are only deductible if you itemize.  If you don’t itemize, I’d still encourage you to contribute, because organizations need your help today more than ever.  I believe that the primary consideration in whether to spend money should be whether it makes your life more meaningful — not just what minimizes your taxes.

Nevertheless, if you can take the tax deduction, then let’s discuss how to maximize it. Continue Reading »

Over the last few years, more companies are giving restricted stock instead of stock options as incentives for key employees.  Accounting practices began requiring stock options be recognized as an expense, hitting the bottom line of corporate balance sheets.  As a result of the shift, more employees now need to deal with the tax implications of restricted stock. Continue Reading »

Employee stock purchase plans (ESPP) enable employees to buy company stock at a discount.  The details can vary for each company, so please consult your company’s ESPP documents for your particular situation.  I was recently asked how to calculate taxes for stock sold from the Varian Semiconductor (VSEA) ESPP, so I’ll use this company as an example.  Many companies use a similar plan. Continue Reading »

Mutual funds typically pay dividends at the end of the year.  (Ok, maybe not this year.)  And you pay tax on those dividends.  Many investors reinvest the dividends by buying more shares.  When it comes time to sell, remember to include the dividends (that you’ve already paid tax on) in your basis value.  This will lower your capital gains, reducing your tax.

It’s a good time to convert an IRA into a Roth, if you have the cash to pay the tax.  This is true for two reasons: 1) the value of the IRA is deflated (since the market is so low) and 2) tax rates are likely to go up (this is just my humble opinion since someone’s gotta pay for bailing out the bankers).

Converting your IRA into a Roth is considered a distribution, and adds to your taxable income, so don’t get too crazy and convert the whole thing, or you’ll end up in a higher tax bracket.  Consider converting a chunk – say, $10k or 20k – this year and perhaps more the next year, if the market is still down.  If you’re in the 28% tax bracket, you’ll owe $2,800-5,600 in tax in 2009, so this is not exactly cheap, but since the Roth grows forever tax-free, you may save in the long run, if the market recovers significantly.

If you expect to retire in a substantially lower tax bracket, then this is probably not a good strategy for you.  It works best if you happen to have a low income year, but that also makes it a tough year to pay the tax.  At any rate, you may want to consult a financial advisor to see if this makes sense for you.  There are income limits for IRA conversion that are currently scheduled to disappear in 2010.

IRS pub 590  IRAs

For those individuals in the 10-15% bracket for federal income tax, your capital gains tax rate was 5% in 2007 and dropped to 0% in 2008.  Just be careful that the capital gains don’t push you into a higher tax bracket.  Of course this is if you’re lucky enough to have capital gains in this lousy market.  For the rest of us, remember that the maximum deduction for capital losses is $3,000 ($1,500 if married filing separately).  Capital losses in excess of the deduction may be able to be carried over to future tax years.

IRS Pub 1040 Schedule D Instructions p. 2 and NPR.