Tax Planning: Preparing for the New Year

In less than a month, almost a million party goers will converge in Times Square to say farewell to this year and ring in 2012. Countless more will watch the events on television or celebrate the New Year in their own way.

Unfortunately, most will realize after the ball has dropped that they should have done more regarding this year’s tax planning. But then it’s a little too late.  I visit with families in my office daily who are in or near retirement and I usually discover that most of these families make financial decisions without thinking about how it may impact their tax returns.

This is an excellent time of year to get your financial house in order.  Start by gathering cash receipts to help calculate possible deductions and miscellaneous payments.  Then, consider the following year end tax strategies:

1) Contribute the Maximum to Your Retirement Plans:  Tax-deferred investing is a smart choice because it allows your money to grow tax-free until you withdraw it.

• IRAs: You can contribute a maximum of $5,000 dollars plus an extra $1,000 dollars if you are age 50 or older. This limit can be split between a traditional IRA or a Roth IRA, the combined limit is still $6,000 dollars. You have until April 17, 2012 to make IRA contributions for 2011, but the sooner you get your money into the account, the sooner it has the potential to start growing tax-deferred.
• 401(k) accounts:  Fatten your 401(k) account with contributions up to $16,500 dollars in 2011 (or $22,000 dollars if you are age 50 or older). 

2) Double and Triple Check IRA Required Distributions: You are required to make minimum distributions from your retirement accounts by December 31, 2011 (April 1 is the deadline in the first year after you turn age 70½ - although waiting will only force you to double up on your taxes next year.)  Failing to take out enough money from your retirement account triggers a 50-percent excise penalty in addition to the original taxable distribution which you will still be required to take. If you would rather give the distribution to charity, you will be happy to know that the qualified charitable distribution provisions are still allowed in 2011, but may not be renewed in future years. Individuals age 70½ or over can exclude up to $100,000 dollars from gross income that is paid directly from their individual retirement accounts to a favorite qualified charity. The excluded amount can be used to satisfy any required minimum distributions that you must otherwise receive from your IRA.

3) Go Loss-Harvesting: Selling investments such as stocks that have experienced losses can help to offset any taxable gains this year. If your losses are more than your gains, you can use up to $3,000 dollars of excess loss to decrease other taxable income. Losses can be carried over every year for as long as you live, and these losses do not pass onto beneficiaries. Tax rates on capital gains are uncertain after next year, so you may even consider selling some higher appreciated investments today to avoid a probable higher gain rate starting in 2013.

4) Consider Strategic Tax Planning Strategies: Year-end tax planning is especially challenging this year because of ongoing uncertainty regarding future tax rates so spending a little time on strategic tax planning is a good idea.  Congress has to deal with a number of tricky issues, such as what to do about the expiration of the Bush-era tax cuts on December 31, 2012. Every dollar of your retirement accounts eventually have to be taxed as withdrawals are made so consider the benefits of a Roth conversion. Even if there is no major tax legislation in 2012, actions this year and next at historically low tax rates may reduce future taxation at higher tax rates beginning in 2013. Restrictions on who can take advantage of Roth conversions from IRA accounts have been eliminated, so everyone can participate.

Significant tax changes are sure to come in the near future – so outline and develop strategies this year to help reduce your taxes in the future.