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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax Law Changes: The 5 Smartest Moves to Make in 2011

After a whole lot of hand-wringing throughout 2010, policy makers in Washington decided to leave the tax code largely intact for 2011. Though the recent agreement appears to be locked into place for two more years, a group of bipartisan legislators aims to tackle the thorniest and most intractable issues.

If they succeed, a range of tax law changes may occur in 2012, not 2013, meaning the moves you make now could have a significant impact on your taxes down the road.

Here are five items that bear watching.

1. Capital gains.

Taxes on dividends and appreciated investments remain at 15% for 2011. Yet any new tax law changes could revert capital gains tax rates closer to 25% starting in 2012. As a result, the coming quarters may be the last best chance to lock in profits on some of your best investments of the last few years. And it may not make sense to wait until the end of the year. That's because any discussions about changes in capital gains may spook your fellow investors and lead them to take profits in some of those same hot stocks.

Companies such as (NYSE: CRM), Netflix (Nasdaq: NFLX), Chipotle Mexican Grill (NYSE: CMG) and Apple (Nasdaq: AAPL) have created massive profits for many investors. So these may be the first to see profit-taking if capital gains changes start to be discussed in coming months. Look at all of the stocks in your portfolio and rank them by how much they have appreciated since you bought them. The stocks at the top of the list are the most logical candidates for profit-taking.

[Click here to learn the 5 Telltale Signs It's Time to Sell Your Stock.]

2. Accelerate income into 2011.

Since it's virtually impossible that tax rates will be lower in 2012, and there's a good chance that many taxes will be higher, it makes sense to complete any taxable transactions this year.

For example, retirees that are looking to sell a home without plans to purchase another one will be subject to taxes on the difference between the sales price and their investment basis in their home. Coupled with the more remote chance that homeowners will lose some or all of their mortgage interest deduction, this could mean that 2011 is the best time to pull up stakes.

3. Take full advantage of the gift-tax loophole.

Many seniors hang on to their wealth while they're alive, passing it along to heirs only when their estate is being settled. But for those that have more than enough saved to live out a comfortable retirement, it may make sense to reduce the size of your estate by giving up to $10,000 each year to each child, which is a tax-free move. Right now, the estate tax only trips up the wealthiest of families, but nothing will be off the table when it comes to fixing the deficit. When Washington finally does so, the estate tax and the gift tax may be heavily modified.

[Interested in more powerful estate planning techniques? Click here to learn How to Shield Your Wealth With a Trust and The Benefits of a Family Limited Partnership.]

4. Hold off on write-offs.

#-ad_banner_2-#If you run your own business, try and extend the life of any equipment you use, at least into 2011. Replacing computers, printers, vehicles and other high-cost items can all be immediately expensed or written-off over time. But it makes greater sense to capture those deductions in future years if you expect (as I do) that taxes will be higher.  

5. Max out on retirement contributions.

This is what we financial journalists call an "evergreen" because it's sage advice to remember every year. The money you set aside in your 401k or IRA is money that Uncle Sam won't touch until you're retired (and you'll presumably be in a lower tax bracket then).

The move is even more important if you're in an employer-matching program, which is the closest thing you'll ever get to free money. If you're wary of the ever-rising stock market, you don't need to put that money into stocks. You can simply park it in money market funds and save the money for a future market pullback. Even simply getting minimal interest in a money market fund still reaps major savings from the tax man.

[More 401(k) tips and answers: The Consequences of Borrowing Against Your 401(k).]

Taxes are going up. It simply seems inevitable. Which taxes are raised, and whether they go up in 2012 or 2013 are the still-unanswered questions. But it pays to stay tuned and start acting sooner rather than later. If you wait until the end of 2011, it simply may be too hard to make these moves on a timely basis.