All Things Financial Planning Blog

As the malls and retailers prepare for the Holiday Season, we should be reminded that another year is coming to a close so it’s time for you to review your personal tax circumstances for opportunities to reduce taxes this year or to benefit yourselves, perhaps, by deferring, if possible, income recognition into next year. What are the things that you should be looking for or the types of strategies that you should be considering? Let’s review a few …

Group, or Workplace Provided, Benefits. The fall is enrollment time in most group plans so you should review what options you have available and then make appropriate changes based on your usage reviewed this year and then incorporate changes expected in family circumstances and/or needs in the coming year. Significant FSA changes occur in 2013. Don’t forget that tax law changes already in effect no longer allow set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. If you might be in line for a year-end bonus and it would benefit you from doing so, consider seeking to have that payment deferred into next year.

Paying By Credit Card. If there might be a deductible expense that could be paid for this year but you are postponing the expense because of current cash flow constraints, pay by credit card and pay down the balance on the first pay cycle of the new year.

AMT. As with tax planning for the entire year, never overlook the alternative minimum tax. Planning opportunities like paying in December our January 15^th state income tax estimated payment, or paying our second homeowners tax bill installment that might be due next year but could be paid along with the first installment being paid this year, all might be for not if their tax benefit received for regular income taxes would be lost because we were subject to the alternative minimum tax (AMT). This would be true of any ‘bunching’ of deductions technique of timing eligible itemized deductions to attempt to optimize tax benefit between tax years.   

Sales Tax Deduction. If you are getting tax benefits from taking the sales tax paid deduction instead of the state income tax deduction, consider accelerating any large ticket purchases into 2011 because this provision sunsets this year unless Congress acts.        

Higher Education Deduction (IRC 222). If you are getting tax benefits under the ‘above-the-line’ education deduction for qualifying higher education expenses [available for those that were excluded from benefitting from AOTC (Hope) or Lifetime Learning credits because of AGI limitations], consider prepaying your 1^st quarter, or semester expenses, of next year, before this year ends because the above the line tax deduction benefit goes away in 2012.

Charitable Contributions. If you are considering gifting to charity, be sure to ‘tax optimize’ the value of your gift. The giving of gifts of appreciated (or no basis) property is usually best. If you are age 70 ½ or older, own an IRA and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee to the charity. Such a transfer, if made before year-end, can achieve more valuable tax savings.

Homeowners. If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012. Other energy credits may be available for more sophisticated energy improvements and these sophisticated energy credits do not sunset this year. 

Tax Loss Harvesting. One major annual review that should be undertaken is a review of our securities holdings. What assets might you want to continue to hold and what assets might you want to discard? If you are to discard some assets, how can you optimize the tax benefit that you might receive from a sale of an investment? The government allows you, in most cases, to take a $3,000 loss per year on our tax return and if you have more losses they carry over indefinitely for future use. Using losses to ‘shelter’ gains is a harvesting strategy of blending the taking of gains with losses. The only prohibition the IRS imposes on these strategies is that you cannot buy back ‘substantially identical’ securities within 30 days of the (30 days before and 30 days after) transaction.     

RMD. Don’t forget to take out your required minimum distribution (RMD). You don’t have to be 70 ½ (or by April 1^st the year after the year in which you turn 70 ½) to fall under this rule! An inherited IRA might have an annual requirement (beginning by 12/31 the year after death) of distribution over your lifetime or by the end of a 5 year period whichever rule applies!

HSA. If you become eligible to make health savings account (HSA) contributions even as late as December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

Gifts. Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.    

Retirement Planning. Sadly, October 1^st was the cutoff for establishing a SIMPLE retirement account if you had self-employment income. However, you can still do a (1) 401k (December 31 setup, due date of tax return plus extensions to fund), a (2) defined benefit plan (ditto 401k rules) or a (3) Simplified Employee Pension (can be setup and funded by the due date plus extensions – your last salvation if you failed to plan). There are variations and gyrations of plan types but the foregoing are the usual suspects. Of course the IRA can be funded (for a 2011 tax year contribution credit) up until April 15^th. Should you consider a Roth conversion before year end? The special two year to pay the tax rule won’t be available, but should you consider doing a conversion in 2011 anyway? If the conversion turns out to be the wrong decision, there are opportunities to ‘recharacterize’ your converted Roth back to a Traditional IRA within certain time lines. Sorry the 2010 Roth conversion recharacterization opportunity passed on October 17 of this year.

These are but a few of what could be an exhaustive list of year-end tax strategies to consider. The Holidays, family and celebrations will soon be upon us and you might not have the time or the inclination to consider some of these valuable moves before year end! Don’t let the opportunity pass you by to put some hard earned, ‘otherwise going to the government’, dollars back into your pocket.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA