Tax Strategies to Consider Before 2010
If the recession has touched your life financially, you might want to do some tax planning to either postpone or accelerate your tax deductions and/or income. For those anticipating more income this year than next, it may be prudent to accelerate deductions and postpone income. For those anticipating less income this year than next, consider postponing deductions and accelerating income. Here are some ways to do that.
One example might be to do a conversion of a Traditional IRA to a Roth IRA. This will result in more income in the year completed, but will reduce taxes in future years, particularly after the Roth has been in place five years. It will be necessary to look at how the additional income will affect your taxes this year before you do complete the process.
Another option is to review the assets you hold that have appreciated in value. As we do anticipate higher capital gain taxes in the future, this may be a good year to sell and take the capital gain in a low income year. Again, a review of the affect on your overall taxable income is appropriate before selling.
From a deductible expense standpoint, consider paying real estate taxes for the year either in December or January depending on which year you anticipate being in a higher tax bracket. This can result in two real estate tax deductions in one year and none in the other year. This strategy makes the most sense for those close to a threshold of a higher tax bracket or for those who have itemized deductions that barely exceed the threshold for the standard deduction ($11,400 for married, $5,700 for single). For those who do not itemize but do pay real estate taxes, this year you can deduct $1,000 ($500 single) for real estate taxes in addition to the standard deduction. You may have the opportunity to prepay other itemized expenses on your tax return as well.
This is a good time of the year to review whether you need to reduce or increase withholding of your taxes. Most people over withhold and, as a result, they end up making interest free loans to the government. Many of these same people are borrowing money at excessive interest rates with credit cards. If you received a substantial refund this past year, file a W-4 form with your employer and increase your number of withholdings.
Another tax strategy is to look for an opportunity to do income splitting with family dependents. Many business owners hire their children, transferring income into the child’s lower tax bracket to be used for paying school tuition. It can also be done for estate tax reasons when assets are substantial.
This is a great time of year to look at charitable planning. Presenting gifts of appreciated assets to avoid capital gain taxes may reduce taxes at the end of the year. The savings and tax reduction is greater with the gifts of appreciated assets.
First time home buyers or those who have not owned a home in the past three years have an opportunity to receive a substantial tax benefit ($8,000) by purchasing before December 1, 2009. There has been talk of extending this tax benefit but a final decision has not yet been made.
Finally, review benefits from your employment to make sure you are taking advantage of all the pre-tax living expenses offered by your employer. I recently published an article that addresses these opportunities in more detail (click here).
Robert Ostrander, CFP®
SWS Advisors, Inc.
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