Prognostications and other thoughts

Monday, November 07, 2005

Tax tips

Some tips and rules about Income Tax

Long Term capital gains Capital gains or losses on stocks/bonds/savings etc. The security needs to be held for 1 year. Tax rate is 10% if held for 1 year. Exception: employee stock purchase plans. ESPP requires holding of equities for 18 months to qualify as long term.

Short Term capital gains Capital gains/losses that are held for less than 1 year. Tax rate is 30%.

"Writing off loss" If you have a short term or long term loss, up to $3000 can be deducted from your income.
- Keep track of short term/long term loss. They can be used to offset short/long term gains in the future, year after year.

"Wash sale rules"If you own a stock and it's doing poorly, but you still want to own it, you can sell it at a loss. Then wait 31 days before buying again. This allows you to take your deduction (stock loss) independant of any stock gain. If you buy and sell within that 31 day period you may not be able to write off any loss.

Deductions. In principal, the goal is to reduce your "taxable income" so you have less tax to pay.
Assume your taxable income is $100,000, at 30% tax bracket, you're income tax would be $30k
Now, assume these deductions

Salary $100,000
401k $(14,000)
home loan $(24,000)
car reg $(500)
State tax $(8,250)
Taxable income $53,250

at 30%, your tax burden is $15,975, a "savings" of $14,025

What kind of deductions401k. Up to 15% of your income/up to max of $14k, can be deducted from your taxable income
- Car registration, charitable gifts, property tax and home loan interest can be deducted from your taxable income
- Prepay estimated state tax by the end of the taxable year. This will be deducted from your taxable income.