Your 2006 taxes: Keep more of your investment earnings

February 2, 2007

Use these tips and guidelines to lighten the taxes on dividends, interest, and capital gains.

Soften the bite on asset sales

The most effective way to ease the pain is by reducing the amount of your gains subject to tax. For example, say you built up a large stake in a mutual fund by buying 1,000-share lots at various times. You paid $45 a share in 2001, $22 in 2002, and $35 in 2004-an average of $34 per share. Last November you sold 1,000 shares for $60,000. Based on average price paid, your cost was $34,000, giving you a taxable gain of $26,000. But the IRS will let you figure your profit using the $45,000 cost of the initial lot, even though you hadn't told the mutual fund company to sell those particular shares. Consequently, you can choose to report a net gain of only $15,000 on your 2006 return. (Note that you would've had to use average cost if you'd opted for that method on previous sales from the same fund, so think carefully and run the numbers before you choose how to calculate your profit.)

Take full advantage of losses to offset as much of last year's gains as possible. If they topped your gains, you can deduct up to $3,000 of the excess from your regular income and carry the remainder over to future years.

Suppose you have great stock-picking talent, which enabled you to reap large profits in 2006 with no debits. If you've recently married, make sure to look at your spouse's finances to see if there's any help there. One physician, who was crowing over her stock market gains, married a man last year whose dowry included sizable capital losses carried over from 2005 and earlier. Since the happy couple will be filing jointly for 2006, his losses can count against her gains.

Don't neglect other possible sources of capital losses, which, as the term implies, are first deducted against capital gains, then against other income. If you paid more than face value for corporate bonds that matured last year and you didn't amortize the premium annually while you owned them, you can claim a capital loss on your 2006 return. You can also deduct nonbusiness bad debts and worthless securities. When the contractor building a Chicago internist's new home went belly-up in 2006, the doctor lost his deposit. But he can claim a short-term capital loss for the amount. Keep an eye out for any similar type of losses that you might have.