by Archie M. Richards, Jr., CFP^®
April 2, 2001

Here are a few tax facts that may have escaped you:

• If you hold appreciated stocks, use those, rather than cash, to make charitable contributions. The capital gains tax is avoided, and you can deduct the value of the stock as of the time of the gift (up to 30 percent of adjusted gross income). You'll convert a 20-percent capital gains tax into a 28-percent deduction.

• But if you're using the standard deduction in your return, go easy with the charitable giving. Save the contributions for the years in which you itemize.

• Let's say you're earning considerable taxable interest from bonds, CD's, money market funds, or Treasury bills, taxed at 28 percent. If you can't stomach stocks, switch most of the money to municipal bonds of appropriate maturities. (The longer the maturity, the more volatile the price.) But since the bear prowling Wall Street seems about to give way to the bull, this could be an especially good time to buy broad-based index funds of stocks, both domestic and foreign.

• Municipal bond interest is not taxed by Uncle Sam. The interest from bonds issued by municipalities of your state is not taxed by your state. The interest from bonds issued by the municipalities of other states is probably taxed by your state; the rules vary. The interest from Treasury securities is not taxed by any state, although it is taxed by the feds. (God, how I despise taxes!)

• Oh yes, capital gains from municipal bonds are taxed by everybody.

• If you switch from one mutual fund to another within the same mutual fund family, sorry, you pay capital gains taxes on the sale. The tax effect is the same, whether the money remains in the mutual fund family or not.

• Dividends and capital gains paid by mutual funds are taxable to you in the year they're paid, even if the amounts are reinvested in the fund. Since you have the right to take the money, it's taxable whether you take it or not.

• But don't pay tax on those dividends and capital gains twice. Add each year's dividend and capital gain amounts to your cost basis. When you finally sell your shares of the fund, the adjusted cost is therefore higher and the capital gains tax lower.

• If the preparation of your return reveals that you're switching stocks or mutual funds frequently, knock it off. Hold your securities for at least a year and a day (don't forget the day) to cap the capital gains tax rate at 20 percent. Switching more frequently could incur tax at 39.6 percent instead of 20 percent. Frequent switching is dumb. Stocks usually rise more after people sell than they do before.

• You can deduct job-hunting expenses whether you get the job or not.

• The business use of your home is a red flag for audits. Check the rules. Click on www.irs.gov. Look for "Forms & Publications" and select Publication 587.

• If your taxable income is high, a promoter may suggest that you shield income from U.S. taxes by moving assets to a series of trusts without losing control of the assets. The trusts would be vertically layered, with each one distributing income to the next layer. You'd probably open an account in a foreign bank. Plan on a promoter's fee of $5,000-to-$70,000, plus jail time for you. Check www.treas.gov/irs/ci. The "ci" stands for "criminal investigation."

• If you sell your primary residence, you may exclude up to $500,000 of gains from capital gains tax ($250,000 for singles). You must have lived in the home for at least two of the five years prior to the sale. This exclusion is no longer once-in-a-lifetime; you can use it every two years.

• If you rent your main residence for fewer than fourteen days, none of the income is taxable; don't even report it. You may find this especially useful if your hometown is the site of a big sports event. (You can't deduct related expenses, of course; the IRS isn't that benevolent.)

• Want to tear down your house and build another on the same lot? Find out if your state enables you to gift the old one to the local fire department. The firemen would set the house afire to test their techniques and equipment. Instead of paying demolition costs, you'd get a tax deduction for the house's fair-market value. The fireworks aren't bad, either.

IRS rules, regulations, and related materials concerning income taxes now occupy 45,600 pages. Do you think this is enough?