Charities need help, and you can give it
Next up is charitable giving. This may be the biggest takeaway of all this session. The so-called Rule 68 limits on charitable gift deductions are gone in 2010.
Because you are not limited in deductions for charitable gifts in 2010, you can give generously to your favorite charity and offset some or all of the tax you owe from a Roth conversion.
The limits on deductions return in 2011, along with the estate tax and higher taxes unless Congress acts by year end.
If you have gains from sale of securities or just need additional deductions, now is the time to review your investment portfolio to trim losing positions.
Review investment portfolio to offset gains or add to deductions
During this past year you may have short- or long-term capital gains from the sale of stocks or bond. By selling off losing positions you can offset those gains and if you have no gains, you may deduct up to $3,000 of loss against income. Losses over $3,000 may be carried forward to future years.
ETFs can fill gaps after tax loss sales
If you want to stay in an industry sector, but need the loss, then consider substituting an exchange traded fund or ETF.
QE2
The Federal Reserve has recently announced the second phase of so-called Quantitative Easing, totaling as much as $900 billion, including the purchase of $600 billion of new treasury purchases and $300 billion to replace maturing agency mortgage backed securities.
Already, the Federal Reserve has lowered short-term interest rates to historic levels, and Congress has passed a $700 billion stimulus package, yet still consumer and business response has been tepid. In contrast, foreign reaction has been swift and negative.
U.S. action raising foreign concerns: is this currency manipulation or economic stimulus?
China, Brazil, Russia and EuroZone countries have criticized American efforts to stimulate its economy. This is not so surprising since they are holding huge piles of U.S. debt and the dollar has been sinking lower. They view American moves as currency manipulation. This adds a touch of irony in that some have accused the Chinese of artificially suppressing the value of its own currency. Either way, it sets up the potential for competitive currency policies that could impact the flow of international trade.
In response, both the Fed chairman and President Obama have defended their policies as pro-growth to lift the U.S. economy from its doldrums and to ultimately boost the world economy. There is lively debate even here about potential inflation risk and dollar devaluation.
Inflation risk increases as dollar drops
If the dollar value remains low this could cause foreign goods to be more expensive, but the dollar’s value has rallied slightly in response to debt troubles in Europe and worries about the security situation in Korea. The U.S. dollar remains a safe haven currency in times of uncertainty.
Will the policy work?
The $900 billion question is whether the policy will work. It all depends on how the downstream banks use the additional reserve. Will they find willing and credit worthy borrowers or will they use the cash to improve their own balance sheets?
The basic concept is that if they lend to business or consumers, then the money will flow through the economy and increase economic activity. The risk of inflation comes with increasing demand and constraints upon supply of goods and services.
Before taking action on any of the suggestions presented here, consult your tax advisor. Whether or not any of these suggestions are appropriate for you depends on your tax bracket, your time horizon, your charitable intent, among other things. When in doubt, always check with your tax advisor.
