Is Your Year-End Tax Strategy A Turkey?

It’s that time of year again.  The one day you eat roast turkey, stuffing, cranberry sauce, and pumpkin pie all in one sitting.   No wonder you have to take a nap afterwards.  But once you’ve recovered your appetite, watched all the football games, and done all your Black Friday shopping, you might want to think a little bit about some year-end tax planning.  In fact, if you do much Black Friday shopping at all, you definitely want to think about your upcoming tax bill before year-end.Is Your Year-End Tax Strategy A Turkey?

Here are 3 topics to raise with your CPA before December 31 this year.  If you do your taxes yourself, look in the mirror, wipe the tryptophan-induced sleep from your eyes, and ask yourself these 3 questions:

1. Do I have any losses in my investments?

Now, before you keel over with laughter at the absurdity of that query, consider that the S&P 500 Index  has actually gone up in 2009 by 24%.   Those losses you were moaning about in January are probably somewhat reduced by now.  Unfortunately, there’s no point in worrying about this  in your tax-deferred accounts, but if you have investments sitting outside of retirement accounts, you should consider doing some  Tax-Loss Harvesting.

Here’s what you can do  –

  • Identify those investments that are currently valued below what you paid for them.  For mutual funds, you need to make sure you are comparing the cost basis (which will include reinvested dividends) with the current value.  All mutual fund companies can provide this to you if they are not already  showing that information on your statement.
  • Consider selling the investments.  WHAT you say?  Sell the precious GE  I inherited from my dearly departed great-aunt that I never talked to but really loved?  Well, if it is at a loss, the answer would be yes.  You can always buy it back.  In 30 days.
  • Add up your realized losses.  Be sure to include any costs to purchase and costs to sell the offending item.  You can take up to $3,000 a year in capital losses off your taxable income.  If you have more than $3,000 in losses, you can carry them forward to future tax years and offset your income then.  Consider that this might be really beneficial for you when the tax rates go up  in the near future (oh, yeah – they will).
  • Still want that GE stock?   You have to wait 30 days, but then you can buy it back.  It may even be at a lower price than when you sold it.   Then again, it might not.

2. Have I maximized my contributions to my retirement accounts?

You hear this all the time, but have you actually kept up with the increasing contribution limits?  Here they are –

  • 401k, 403b, 457  Qualified Employer Plans:  under 50 yrs old=$16,500.  /     over 50 yrs old = $22,000
  • SIMPLE IRA Plans: under 50 yrs old = $11,500  /    over 50 yrs old =   $14,000
  • Traditional & Roth IRA: under 50 yrs old = $5,000  /  over 50 yrs old = $6,000
  • SEP Additions Limit = $49,000
  • For qualified employer plans you need to make any changes to your contribution amount before year-end.  For the Traditional, Roth and SEP IRA you have until your tax-filing deadline (for most of us, that’s the dreaded April 15, 2010).

    Depending on your Modified Adjusted Gross Income (start with Line 37 on the 1040),  you may be eligible to contribute to a Roth IRA even if you are also contributing to an employer plan (this includes a SEP).    Those income limits have crept up as well.  For married, filing jointly, if your MAGI is under $166,000 you can both contribute fully to a Roth.  If it’s between $166,000 and $176,000 you can still do a partial contribution.

    And if you are over the MAGI limit and can’t contribute to a Roth?  Consider making a non-deductible Traditional IRA contribution.  It will grow tax-deferred until retirement.

    3. Did I receive a Required Minimum Distribution from an IRA in 2009?

    Read this even if you are under 70 1/2.

    Normally if you are over 70 1/2  you have to take an RMD from your Traditional IRA.  But this year there was a moratorium on distributions due to the appalling performance of the stock market in 2008.  You got a pass!  Many IRA accounts, however, were set up to automatically do this distribution every year.  If you received a distribution you didn’t need that was designated  for the 2009 tax year, you have until December 1 (or 60 days from the distribution) to rollover that money into a new IRA and avoid paying taxes on the income.

    For those of you under 70 1/2 – If Great Aunt Millie of GE stock fame also left you an inherited IRA, you may have received a 2009 distribution this year, too.  If you didn’t need the cash, the same scenario above may apply.   Why pay taxes on that income when you don’t have to?  Unless of course, you think tax rates are going up next year.  See why tax planning is so confusing?

    And, here’s my disclaimer – EVERYONE’s tax situation is different.  Get with your CPA or tax preparer before year-end ( instead of on April 14 next year-you know who you are)  to see if you need to address any of these issues.  Now go start cleaning the guest room – the holidays are upon us.

    Photo by: Sharon Mollerus

    About the author

    Lea Ann Knight, CFP®

    Lea Ann is the Principal of Garrison/Knight Financial Planning as well as the creator of the financial literacy site, Financially Fit After 40. She also writes a monthly column as the Money Expert for All You Magazine.

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