Year-End Tax Planning Checklist: Part II

Last week I discussed several tax saving strategies to consider and this week I am continuing with the checklist of ways to cut your tax bill. Don’t let taxes “spook” you this year!
§         Income and expense shifting:   Review your income and expenses and, to the extent possible, shift them between this year and next in order to maximize your tax benefits. Unless Congress acts by the end of the year, then some will have higher taxes in 2011. This will be the biggest income tax increases that some people have experienced in over a decade. If possible you will want to shift more income to 2010 before tax rates increase. Look at postponing certain expenses until 2011 when in a higher tax bracket which will generate a greater tax benefit.
§         Convert Traditional IRA to a Roth IRA:  There is no income limit on converting to a Roth IRA this year so everyone has the opportunity to do this if it makes sense. When you convert your IRA then you must pay income tax now but all future growth and distribution are not subject to income tax. If you convert in 2010 then you can spread the income tax bill over 2011 and 2012, but with higher taxes in the future then it is most likely better to pay all taxes in 2010. Also converting to a Roth IRA only makes sense if you have money held outside of the IRA to pay the taxes due. If you have an IRA with basis and a company 401k plan, then see if the 401k plan will allow you to roll part of your IRA into the 401k plan. With this strategy you can roll all of your tax deferred dollars into the 401k and leave only the basis (dollars that taxes has been paid on) in the traditional IRA. Now you can convert the remaining basis into a Roth IRA. You will pay zero tax on this conversion since you are only converting basis which is after-tax dollars. The benefit of this is to move this money into an account where you will pay no taxes on future growth. You should consult with your tax advisor before implementing this strategy.
§          Make Gifts: If you have assets that you want to gift to family members then you are allowed to give up to $13,000 ($26,000 for couples) to as many people as you wish without paying gift taxes. This reduces your estate for estate tax purposes and shifts future income and appreciation to the family member who may be in a lower tax bracket.
§         Make Loans:  Consider making loans to family members. The Applicable Federal Rate (AFR) is very low right now. You can make loans to children to help them buy a home, start a business or invest in assets with a higher potential return than the required interest rate charged.
Please remember that 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.
My thanks to Kimberly Reynolds, M.S., CFP®, for her assistance with this article.