Folks, I just posted the following (well, better formatted) on my site and thought I'd share here. I always love to get feedback and input from the MIFP folks, and hopefully some of you will find this helpful as well. The original posting may be found at the link below.
Feel free to pass this along, but please keep my site link and attribution in place, thanks. And, of course, I'm eager to hear feedback and comments (and any other ideas for year-end that I should add!)
Year-End Deadlines
David S. Meyers, CFP
While we recommend planning and managing your finances all year long ? this is a process, not a singular task ? there are a few deadlines which come up at year-end which cannot be ignored. Some of them represent potential missed opportunities, while at least one of them represents something that if you don?t do it in time, you are subject to one of the worst tax penalties on the books. Here?s a short list, and we hope others have more to add: ? Required Minimum Distributions (RMDs) from IRAs and qualified plans. If you are over 70-1/2 yrs old by this year-end, you will need to have taken your RMDs by the end of the year (with the singular exception that if you crossed that threshold this year, you may put them off until early next year, but then you?d have to take two RMDs next year, which most folks really don?t want to do). You must take them ? if you don?t, the penalty is 50% of the RMD you were supposed to have taken ? and you still have to take it and pay taxes on it. If you aren?t certain you?ve taken care of this, contact every provider with whom you have an IRA or qualified plan and discuss it with them. Or contact your financial planner ? but make sure you dig up all the information you?re going to need to manage this ? mainly your year-end 2010 balances in all the plans. Every IRA provider should have sent you a form 5498 during early 2011, that?s a great source of information for this. ? Start a solo 401k, even if it won?t be funded until closer to tax filing. If you have self-employment income, you may have a huge opportunity to put money into a tax-favored retirement plan. If you have no employees, your two best options are likely the SEP-IRA or a Solo 401(k). The latter may afford the opportunity to shield a lot more money, though, and is very well worth considering. In both cases, the actual contributions don?t need to be made until you file your taxes (because until then, you won?t know how much you actually made), but if you are going to do the solo 401(k), you need to have opened the accounts before year-end regardless. And the solo 401(k) may allow you to do things the SEP-IRA won?t: you may establish a plan which allows you to borrow against it, you may make Roth (after-tax) contributions, you may be able to put more than 20% ? as much as 100% ? of your self-employment income into the plan. ? Roth conversions, though timing them may depend on your current tax situation. If you are going to have made a lot less this year than next, you should consider this. If you are expecting a low-income year in the future, these may be worth putting off. These may be complex if you have a mix of deductible and non-deductible contributions in your traditional IRA, too. ? Tax-loss harvesting is a very powerful way to take advantage of the tax treatment of capital gains and losses and of market volatility. If you have two investments, one of which has gone up and one of this has gone down ? as you may well have if your portfolio is well-diversified ? take advantage of the fact that one of them went down by selling at a loss. You may be able to use up to $3000 of those losses against ordinary income, you may be able to eliminate taxable gains in other things, and if you have even more of that, you get to carry those losses into the future to use later. If you have a taxable account with a mix of securities and funds, review your cost basis and current values carefully. Note that to take advantage of this, you have to be careful to avoid the wash-sale rule which means that if you sell something for a loss, you cannot buy the same or something substantially identical within 60 days. So if, say, you sell a S&P 500 index fund at a loss, don?t buy another S&P 500 index fund ? but if you want to keep your overall asset allocation similar, instead of another S&P 500 index fund, you can buy a different large-cap index. ? Prepayments of some deductible expenses if bunching them in alternate years is a strategy to take advantage of standard deductions in alternate years. If you can bunch them up, then in years where they are bunched together, you may itemize deductions, and in years where you have minimized the deductions, you take the standard deduction. Similarly, if you expect to have lower income next year, but a particularly higher one now ? especially if you are in a higher tax bracket now ? it may make sense to accelerate deductions into the high-tax year (see ?charitable gifts? below for more opportunities) ? Making gifts to use up annual exclusions is one of those opportunities that, every year, if you dont? do it, it goes away forever. At the moment, this may not seem quite as important, given that the lifetime gift and estate tax exclusion is $5 million. But unless Congress actively does something about it, that lifetime exclusion is set to fall back to $1 million in 2013 and the last thing you want to see is your estate taxed at the high tax rates which will apply. Every year, you can give away $13,000 to as many people as you like, all of which is in addition to the lifetime limit. A few ways people take advantage of this annual exclusion include funding 529 plans for kids or grandkids, putting money into irrevocable life insurance trusts, or simply giving cash. If your estate is close to or above the limits (or you expect it to be), consider maxing out the use of this annual exclusion each year. ? Making charitable gifts is a very well-known year-end activity. The charities sure know this and remind you. But if you want to take the time pressure off, or take advantage of the fact that you may be in a higher tax bracket this year than next (if this is a high-income year, perhaps from options exercises or other activities), or, especially if you have low-cost-basis stock and want to donate stock rather than cash (thus both avoiding the capital gains taxes as well as getting the full tax deduction for the current value), consider opening an account at a donor-advised fund. With a donor-advised fund, you make the donation today, but recommend that the fund make distributions in the future. This is a very convenient way to minimize your paperwork (only one donation needs to be documents) but maximize the distributions (let the money grow until you are ready to distribute it, distribute to many organizations without having to track them ell, donate stock without having to deal with multiple organizations brokerages, etc). Nevertheless, whether you are using a donor-advised fund or not, if you want the tax deduction now for your charitable gifts, you have until the end of Dec to make them. ? Contributions to your employer?s 401(k) (as opposed to a self-employment based plan) have to be made via payroll deductions. You may have a year-end bonus or only a couple of paychecks remaining in the year, but if you haven?t already maximized your contributions to your 401(k), this may be your last opportunity. ? Improve your home?s energy efficiency and take a tax credit for 10% of the cost up to $500 for a variety of improvements such as biomass stoves, HVAC improvements, insulation, new roofs, windows or doors. And for certain other types of improvements, there are credits up to
30% of cost for certain very substantial projects such as geothermal heat pumps, small residential wind turbines, solar energy systems. For more details, seeIf you can think of anything else to add to this list, we?d love to hear it. And if you have any questions about any of these specific strategies, please let us know.
Copyright 2011 David S. Meyers, CFP