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
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
? 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, see
? tax rates in 2012 will be the same as they are in 2011 due to an extension of the ?Bush tax cuts? that President Obama and Congress came to terms on. But in 2013, unless Congress and the President can come to terms again, rates are going to go up substantially, both on income, capital gains, dividends, and especially on estates. We?ll be keeping an eye on all of this during the coming year.
If 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
- posted 8 years ago