By FPA Member Lisa A.K. Kirchenbauer, CFP®, RLP®
Last Updated: April 26, 2010
There's no time better than today to start doing some tax planning for 2010, right after you have filed your 2009 taxes! Here are some tips that may help you start saving money for 2010…now.
- Start a 2010 or Current Year "Tax-Related" file today! You can start putting receipts in it for deductible expenses, charitable contributions and anything else that might make a difference next April.
- If you got a significant refund (more than a few thousand dollars), change your withholding exemptions this month so that you can have that money available to you before next year. I know some people like having the Internal Revenue Service (IRS) be their savings bank, but it's just not smart. You get no interest or access until you file. If you don't trust your ability to save that money each month, then set up an automatic transfer to a savings account or money market that you don't have checks for.
- If you change jobs in 2010, watch out for double Federal Insurance Contributions Act (FICA) taxes. You can't get them back until you file your 2010 return, but you could decrease your tax withholding to make up for it. It's a good idea to check with your tax adviser on how to calculate your withholding.
- Make your Individual Retirement Account (IRA) contribution for 2010 now. Many investors wait until they are filing their taxes to make a deductible or non-deductible IRA contribution for the current tax year. By investing now, your money starts growing on a tax-deferred basis sooner and you alleviate the last-minute paperwork and cashflow hassles that often happen in April.
- Start considering a Roth IRA conversion strategy. There has been a lot of information put out about how 2010 is a special year because people at higher income levels can now convert existing traditional IRAs to a Roth IRA without income limitations. What we are finding is that it doesn't make sense for everyone AND you need to have the cash to cover the taxes either in April 2011 or April 2012 and 2013. The sooner you make the conversion — if it works for you — the less risk you take that the conversion value and taxes due will go up. Talk to your financial planner and/or tax adviser about how this might work for you.
- Start your investment tax planning now. Do you already have gains for the year? Do you have losses that you could harvest? If the stock market continues to go up, you may find yourself without any losses to harvest against the growing gains from the stock market's huge recovery since March 2009.
Now is the time to take action that can have a positive impact on not only your tax bill next April, but also your cashflow now, while also making the whole experience a lot easier when you do file your taxes or have to pay quarterly estimates.
FPA member Lisa A.K. Kirchenbauer, CFP®, RLP®, is the president of Omega Wealth Management.