Guest post by Lena Rizkallah (learn more about Lena at the end of this post)
It’s the last quarter of 2010 and the holidays are right around the corner. Soon, many of us will line up outside of Best Buy and Walmart hustling for the lasted Wii game or monster truck. But before we pull out the old synthetic Christmas tree and plastic Santa, it’s a good idea to make sure our financial house is in order.
The Bush tax cuts are set to expire at the end of 2010, and if Congress takes no action, it is possible that income tax, capital gains and dividend tax rates may go up for many people. In addition, the Obama deficit commission recently released its preliminary findings, and recommended that many popular deductions for the middle-class–such as a deduction on mortgage interest and charitable contributions-may be reduced or limited in the future.
There is still time to take advantage of the low-tax environment and benefits that 2010 has to offer. As you review your financial and estate plan, consider these planning tips:
1. Sell your losers
If you have some losing stocks, consider selling them to take advantage of capital losses. If you sell stocks with long-term capital gains, you can use up to $3000 per year in capital losses to offset your gains in order to minimize your tax liability. However, beware of the ‘wash-sale rule’ which prohibits you from selling a losing stock and buying the same or similar stock within 30 days in order to take advantage of the losses.
2. Be a ‘do-gooder’
Don’t forget to make your annual charitable contributions. People who make charitable contributions may be able to deduct the value of that cash or property contribution against their income liability subject to certain limitations. In addition, it might be a good idea to consider making donations in 2010 because the tax deduction may change in coming years. One of the proposed changes made by the deficit commission is to reduce the tax benefits of charitable donations. If this proposal becomes law, charitable contributions will be limited to 28% (or whatever rate is determined); individuals in higher tax brackets may not receive a full tax deduction on their contribution.
3. Max out retirement contributions
This year, individuals may contribute up to $16,500 to most employer defined contribution plans (401k, etc.). If you are 50 years or older, you can contribute an additional $5500. Many employers have resumed their matching programs again, and if you’re one of the lucky ones with employers that make matching contributions, you can get more retirement bang for your buck this way. If you have an IRA, you can contribute up to $5000 this year and an additional $1000 if you are aged 50 and over. For SIMPLE plans, the contribution limit is $11,500 or $14,000 for people 50 and over.
4. It’s not too late for a Roth conversion!
This year, the income limitations for converting to a Roth IRA disappeared; this means that anyone may be able to convert their traditional IRA and most qualified plans to a Roth IRA. The benefits of Roth IRAs are unique, especially in a rising tax environment. Individuals may make qualified tax-free distributions from their account as long as the account has been open for five years and they are over 59 1/2. In addition, there is no RMD requriement with a Roth so an account holder never has to take a distribution; the Roth distributions may potentially be passed on to beneficiaries tax-free. The best part is that people who convert from a traditional to a Roth may change their mind. If you convert to a Roth and want to revert back to a Traditional IRA, you have until October 15 of the year following the year of conversion to make the recharacterization.
5. Forget the Gap gift certificates and Barbie dolls–give the gift of CASH (or stock)!
You can gift up to $13,000 in 2010 ($26,000 per couple) without being subject to gift tax, and you can make unlimited gifts (to different donees). Consider making gifts to family members (if you can) or establish a 529 College Plan and contribute your annual gift. In addition, individuals may make unlimited payments for college and medical expenses as long as they are made directly to the institution. This is a great way to remove assets from your estate and minimize potential tax liability.
About the Author
Learn more about Lena Rizkallah at http://MosaicConsultingOnline.com.