Act now to save on taxes later
By Roger S. Stinnett

What you do with your investments between now and the end of the year can have a big impact on your 2006 tax bill. With that in mind, here are some tips for making the most of your opportunities to save on taxes:

+Specifically identify shares sold.

At the time of the sale, make sure that you identify the specific tax lots to be sold. Sell the shares with the highest tax cost first to reduce the taxable gain (if appreciated), or increase the loss (if depreciated) to use against other income.

+Use your capital losses. The capital gains in your portfolio can be reduced by selling securities (or other property) in which you have unrealized capital losses. If you generate more capital losses than gains, you can deduct up to $3,000 per year against other ordinary income.

+Beware of the "Wash Sale" rule.

When harvesting your losses, make sure you don't negate them by acquiring the same security too close to the date on which you took the loss. The IRS says that you must not purchase the same security 30 days before or after selling and recording the loss or they will disallow your loss under the "Wash Sale" rule.

+Reevaluate fixed income strategy under the alternative minimum tax.

If you anticipate being in an AMT situation, consider the impact on your fixed income strategy. You may be able to achieve a better aftertax result by structuring your fixed income portfolio with a mix of taxable and taxfree bonds.

+Look at cash holdings. For various reasons many individuals regularly maintain significant cash positions. If you are affected by the AMT, you also should be evaluating whether you want to have these balances in taxable or tax-free money market accounts. Business owners should consider this as well for their pass-through entities.

+Don't let the tax tail wag the investment dog. As with any financial planning strategy, work with your investment adviser to make sure that tax planning does not impede investment performance.

Roger Stinnett, CPA, CFP, CIMA, is vice president and manager of Tax and Financial Planning with City National Bank. For more information, call (800) 7088881.