By FPA member Lisa A.K. Kirchenbauer, CFP®, RLP®
Last Updated: November 8, 2010
It’s that time of year again and 2010 presents some important tax planning opportunities for individuals and businesses before year-end that may not be available in 2011 and beyond. This year is trickier than most. At this point, it is unclear what we can expect in terms of tax rates increases or an extension of some/all of the Bush era tax credits and reductions. This may also be a year to consider hiring a tax professional to make sure that you have taken all the actions that you can before year end.
- Consider accelerating income and capital gains, and deferring deductions IF you believe that rates will rise in 2011.
- Check your mutual funds’ expected capital gains.
- Consider selling assets with built-in losses (before the stock market moves up to high and the bond market loses its rally) to offset any realized capital gains in 2010 and beyond.
- Seriously consider a Roth Individual Retirement Account (IRA) conversion if:
- You are under age 50.
- Your income is significantly lower this year than you expect it to be in subsequent years (if you are anticipating significantly lower income/tax rates in 2011 and 2012, then you may choose to convert now but elect the special 2010 option of deferring the tax payments until 2011/2012).
- You have made non-deductible IRA contributions in the last few years.
- Review, changes to your corporate benefits to ensure you are taking full advantage of medical spending accounts and if possible, elect to pay your long-term disability premiums after-tax to ensure tax-free benefits if you ever need to make a claim.
- Try to maximize your 401(k) contributions for 2010 ($16,500 for those under age 50, $22,000 for age 50 and older). If you have some savings, and can elect to take a smaller paycheck or two, consider getting as close to the limits as possible.
- Consider refinancing your primary mortgage and rolling in any home equity loans or lines of credit while rates are at historic lows — if you feel that you will not be able to pay off those loans in the next few years or don’t plan to sell your house in the next few years. If you think that you will be able to pay off your Home Equity Line of Credit (HELOC) in the next 2-3 years, then consider keeping it separate and only refinancing the primary mortgage. You should carefully consider a 15-year loan versus a 30-year loan. If your cash flow is variable, but you would like to pay your mortgage off early, choose a 30-year loan and make extra principal payments annually or monthly, or pay bi-weekly.
- Are you a small business owner making $150,000 or less in net Schedule C income? If you have no employees or have your spouse as your business partner, consider an individual 401(k) instead of a Simplified Employee Pension Individual Retirement Account (SEP IRA). However, you must set up (not fund) the plan before year-end to be able to consider funding it for your 2010 taxes. Check with your tax adviser to see if this kind of plan makes sense for you and how they want you to handle funding.
In short, there are some year-end opportunities that always exist for the savvy and proactive person, but 2010 brings some unique opportunities and challenges that warrant some extra planning before you miss the chance to take advantage of them.
FPA member Lisa A.K. Kirchenbauer, CFP®, RLP®, is the president of Omega Wealth Management.