Category Archives: Asset Allocation

Year-end Tax Planning, Tax Credits, and all Continued

Posted on by

There are two parts to this e-mail – year-end moves for 2009 and planning for long-term capital gains rate changes over the next three years…..

First is a repetition of some year-end ideas to make sure you have addressed all that you should to save taxes, between 2009 and 2010 combined.

One idea to check out is the sales tax deduction for purchase of a large item like a new car, especially with all the sales on cars at year end. These and other ideas are reprinted from Kiplinger’s below, along with links to other articles.

Also, be careful about withholdings – some people had reductions early in 2009 and will end up owing taxes if they do not change the withholding rate now or pay an estimate

Remember to use the 2009 $13,000 gift exclusion before it expires.

Finally, you can adjust your withholdings the other way if you will have the benefit of the first-time home buyer credit or expanded tuition credit.

Second is a strategy on capital gains. As we said, this is a year for planning 2009, 2010 and 2011 taxes. The long-term capital gains rate will remain at 15% in 2010, but then the rate jumps back up to 20%. This argues for selling in 2009 or 2010 to increase the basis, buying back and then having less taxed in 2011 or later at the higher rates.

Reprinted below is a table from Wikipedia along with their description of the US Capital Gains Tax.

There are many issues raised in this Newsletter, so let me know if you have questions or comments.

Thanks,

Steven

Review Your Year-End Tax Plans

Making the right moves now can save you plenty.
By Mary Beth Franklin, Senior Editor, Kiplinger’s Personal Finance
November 17, 2009

The end of the year is fast approaching, but you can still take steps to lower your 2009 tax bill. Don’t focus just on this year, though. Look ahead to next year as well. That may help you decide whether you should take advantage of certain tax breaks due to expire at the end of this year, such as a sales-tax deduction when you buy a new car, or delay action so you can reap a tax break still available in 2010, such as claiming a tax credit of up to $1,500 for installing energy-efficient home improvements.

In general, it makes sense to accelerate as many deductible expenses into this year as possible to reduce the income that’s taxed on your 2009 return. But that’s not always the case. If you expect to be in a higher tax bracket next year, for example, you may be better off postponing some deductible expenses until 2010, when they will be worth more.

Those who itemize have plenty of leeway when it comes to shifting deductions. Start with state and local income taxes. Mail your January estimated payment in December and you can claim a deduction for the payment this year, not in 2010. (Warning: this doesn’t work if you’re subject to the alternative minimum tax. State taxes aren’t deducted under the AMT, so there’s no benefit in accelerating the payment.) Or, make your January 2010 home-mortgage payment before the end of this year and you can deduct the interest portion in 2009.

Accelerating charitable contributions planned for next year into this year will boost your itemized deductions. Just make sure your mail the check or charge the donation to your credit card by December 31 so the gift counts for 2009. And if you’re close to exceeding the threshold of 7.5% of adjusted gross income for medical expenses, consider getting and paying for elective procedures in 2009.

Sometimes you have to spend money to cash in on certain tax breaks, such as buying a first home or purchasing a new car. But pay close attention to income eligibility limits to make sure you’re able to capture these and other tax breaks. Some incentives, such as the home-energy tax credit, are not tied to your income.

In the coming weeks, we’ll be rolling out a new tax tip every weekday. You can sign up for outo have the best and latest tax information delivered right to your in-box.

Let us know if you have questions or comments. Thanks,

Steven

More Tax Strategies – Three Year Planning for this year-end

Posted on by

Because some tax laws will lapse by their own terms and because new laws will certainly be enacted, the year-end tax planning for 2009 differs from most years: you need to also consider the changes that will occur in 2010 and even 2011.

First, when the Bush tax cuts expire in 2010, the two top tax rates will move up from 33 percent and 35 percent to 36 percent to 39.6 percent. For a couple making $500,000, the added tax will be about $6,000 per year, for a couple making $1 million about $30,000.

Second, the 15% capital gains rate will end. So, do you sell stocks now, perhaps using capital losses from prior years to shelter the gain, in order to increase your basis so that when you later sell, less will be taxed at the higher rate?

Third, IRA distributions may be taxed at higher rates in the future. So, do you take the current law deferral and not distribute in 2009 or instead distribute anyway so that less comes out in future years at higher rates?

Fourth, do you delay major deductions such as planned charitable gifts? The deduction could be worth more in 2011 or you could be in the AMT.

There are some changes the did get enacted for 2009 that help:

The first time home buyer credit of $8,000 is extended for contracts signed by April 30, 2010 and closing by June 30, 2010 (however, there is a phase out of this credit for high income filers).

Also, small business can carry back 2008 or 2009 losses five instead of two years.

All of these issues can lead you wondering what to do. The starting point, whether you do the work or hire someone to do it for you, is to create good working tax projections for 2009, 2010 and 2011. From these, you can see if you are in the AMT or not, if you will have more income taxed at higher rates in the future, etc.

Let us know if you have questions and what help we can supply …..

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven

To convert or not – traditional IRA to Roth IRA …

Posted on by

Converting a traditional IRA to a Roth IRA results in current income taxes. Also, certain taxpayers with high income cannot avail themselves of converting

If you have money outside your IRA that can cover the taxes, you are more likely to want to convert the IRA. The reason for doing so is that no taxes are due on withdrawals during retirement. Also, the asset passes to heirs with no income tax.

However, you are trading the taxes now, lessening your total investments, for future taxes. So you need to work through the decision to convert carefully

The calculation is complicated and, for example, if the traditional IRA were to be subject to taxes at a lower rate than now, converting might make sense.

A list of concerns appears below. If you are considering making this conversion and want help with the decision, let us know.

Thanks,

Steven

___________________________________________________
First, Bob Keebler is a CPA with a major accounting firm, Baker Tilly, in Appleton, Wis., and author of The Big IRA Book. Here’s his reaction to the article:
“The math of the conversion is more complex than this author addresses:
• When rates are going down the conversion likely makes no sense.
• When rates are going up the conversion is more likely to make sense.
• Conversions are likely better for the person who does not need the funds to live off.
• Conversions are generally better for the person that has outside funds to pay the taxes.
• Conversions for a couple before the first death can make sense.
• Conversions with the intention to monitor the market often make sense.
• Conversions for a person with an estate tax problem will make more sense than for a person without an estate tax issue.
• Conversions to leave a Roth to grandchildren often have merit.
• Conversions for a person with an NOL or other carryforward can make sense.
“This question is very complex and a calculator cannot replace the professional’s judgment.”

Planning for emergencies

Posted on by

A client asked for detail on the list for “in case of emergencies” documents

Here is an expanded version of what I have used in more recent financial plans, for the text on all the planning analysis:

You should consider compiling a reference book or adding to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

1. Location of original will, trust, etc.
2. Location of health care proxy and durable power of attorney
3. List of professionals: doctor, attorney, CPA, etc.
4. List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.
5. Location of insurance policies and valuables such as original titles, etc.
6. Location of safe deposit box for valuables and items in #5 of 7
7. List of all bank and investment accounts and location of any stock certificates or other documentation for investments
8. List of all mortgages, loans and credit card accounts
9. Any appraisals or other listing of items by value
10. All automatic debits that need to be addressed

If you have questions, additions or comments, let me know

Thanks,

Steven