Year-End Tax Planning Checklist: Part I

With less than three months remaining in 2010, now is the time for year-end tax planning. Most people can exert some degree of control over their tax bill if they maximize certain tax strategies available to them this year. Here’s a checklist of items you should review now:
  • Green Home Improvement Credit: You can get a tax credit for making green home improvements through the end of this year. You can get a 30% tax credit, up to $1,500, for making small energy efficiency upgrades such as adding insulation, replacing windows, getting duct seals and adding energy efficient doors. If you make a big upgrade, such as solar panels or a wind turbine, you can get a 30% tax credit — no limit or cap on how much.
  • Invest in your 401k plan: Make sure you are deferring either the maximum or the most that you can financially afford. Many companies match employee’s contributions up to a certain percentage so you want to make sure you are deferring enough to receive the full match. That is free money! The maximum contribution in 2010 is $16,500, plus individuals age 50 and over can make an additional catch-up contribution of $5,500. 
  • Donate to Charity: All gifts must be made by year-end to receive a deduction in 2010. In addition to checks or cash, consider giving appreciated stock from your portfolio to avoid capital gains tax on the sale.
  • Required Minimum Distribution from IRAs: If you are age 701/2 or older, then required minimum distributions (RMD) are back! If you have to take a distribution from your IRA and you have charitable contributions to fulfill then I recommend you give part or all of your RMD directly to the charity. NOW… Congress has not passed this into law for 2010 and no one knows if they will but there is no downside to doing this right now. The pro for giving your RMD directly to charity is it will reduce your Adjusted Gross Income. A lower Adjusted Gross Income can reduce your exposure to phase-outs on your Itemized Deductions and can lower your Medicare Part B premiums if you are subject to the Income-Adjusted Part B premiums. If Congress does not pass this then you would just have to report the RMD as income and then take the charitable gift deduction your Schedule A as an itemized deduction.  
  • Manage your capital gains: Many people have loss carry forwards from the previous years due to the market conditions. If you have capital gain income this year then make sure you have enough loss carry forward to offset this plus enough to take $3,000 against ordinary income. If you don’t have a loss carry forward from last year then consider selling any positions you have with losses to offset the gains.
  • Sell Investments for Long-Term Capital Gains: If you’ve been holding on to some investments with gains, now might be a good time to sell them. Through the end of 2010, there is no long term capital gains tax for those in the 10% and 15% tax brackets. For everyone else, capital gains top out at 15%. Next year though, capital gains tax might shoot up to as high as your marginal tax rate!
Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year. Next week I will have Part II of Year End Tax Planning.
My thanks to Kimberly Reynolds, M.S., CFP®, for her assistance with this article.