Within just a few months you must review your tax situation and take advantage of opportunities to defer or reduce taxes. One key area is for those who have money invested in mutual funds. Thanks to a late rally in the market, stock-based mutual funds look likely to end the year in positive territory. The market is overall up around 7.5-percent for the year, although things can change quickly as we have seen in the past.

Since December is the month most mutual funds issue their largest dividend/capital gains distributions of the year, you can still clean up your portfolio before these tax events take place. That means you should quickly review your mutual funds to determine three key pieces of information:

1) Do you have a net gain or net loss in your mutual fund for tax purposes?

2) What is the estimated distribution in December and when will it happen?

3) Do you really want to hold this investment long-term, or would it be better to replace it?

Let’s first look at the gains. What we are talking about here is being knowledgeable of your cost basis. Cost basis is an accounting term that means the amount you have invested in a given investment including all additions and reinvestments of dividends or gains. As an example, most people have the dividend/capital gains their fund pays reinvested into the fund. This raises your cost basis. Your statement or the investment company where your funds are held will be able to tell you your cost basis.

Next, call the fund company you are investing with and ask them what is the expected dividend and capital gains distribution this month. Then ask them on what date this will be paid out. The company will tell you the percentage of your fund which will become taxable as income this year. If you have $100,000 invested in a fund and the distribution will be 8-percent, then you will have $8,000 of taxable income which you probably won’t even see.

Now comes the tricky part. Do you have an investment that you really want to hold on to for the long-term? Depending on your answer, there are different ways to handle things. The bottom line is that you do not have to simply allow $8,000 of taxable income to be charged to you. You can permanently or temporarily sell the fund to avoid the distribution. In fact, by doing this, it is possible that you may even lower your taxes or offset other income.

As always, you should consult with a qualified tax and investment professional before making any decision. But, this move could save you thousands, even tens-of-thousands of dollars. So don’t just sit back and let taxes happen – take charge!

At this time of year you should also be looking at positioning yourself for more income in 2011.

Most of our clients are tired of the low rates on CDs, and frustrated that their income has been cut by 30, 40, or 50-percent and even more in the past year or two. Again, you do not have to simply accept this. You can and should take action.

December is traditionally a slow time for banks and investment companies. This makes it a perfect opportunity to take advantage of year-end interest rate specials. These types of deals vary widely, and there are truly too many opportunities to discuss in this space. From indexed CDs and annuities, short-term bonds to special opportunities for accredited investors, I see more interest rate options for seniors than I have in many years. You should contact our office, or any financial professional, to find out how you can lock in higher rates before the year ends.

As a side note, I’ve seen a couple opportunities for “accredited investors” (those with a net worth above one-million dollars) that are paying extraordinary rates given the times we are in. For further information on this you would need to contact our office directly.

William Jordan is a nationally recognized financial advisor and well known speaker on a variety of financial and investment topics. For a free Retirement Income Assessment, contact his office at (949) 380-8600 or at www.WilliamJordanAssociates.com.