Year-End Tax Planning: What You Need to Know
Posted Dec 2 2010 by Gustavo A Viera CPA in Tax with 0 Comments
I’ve often been asked: “What’s a good investment?” or “How should I invest my IRA funds?” or “Which do you like better: stocks or real estate?”
But with the current economic environment, I’m hardly asked these questions anymore. Everyone is broke.
On top of that, Uncle Sam, as well as our state and local governments, take big chunks of our take home pay, leaving most Americans with very little to invest.
When you add up all the taxes you pay: federal and state income taxes, FICA and Medicare, property taxes, sales tax, and various excise taxes, you may be surprised to find that as much as 75% of your income lands in the tax man’s lap.
These days, my advice is to invest in you; start by minimizing your tax liability so you have more money to hopefully parlay into cash.
Tax planning is an essential first step in minimizing your tax liability and creating a little more wealth in your pocket. And if the Bush tax cuts are allowed to expire, we will be facing a huge tax increase.
Opponents of letting the cuts expire argue they only help the wealthy. That might not be the case: Low income Americans in the 10% (lowest) tax bracket will face a 50% increase in their tax liabilities when the minimum bracket rises to 15% in 2011. The elderly who rely on dividends and interest to support them will no longer benefit from the capital gains rate and will be taxed at ordinary income rates. It’s going to get ugly.So here’s what you need to do: Wait until Congress decides whether the Bush tax cuts will be allowed to expire, or if our newly-elected lawmakers will extend them.
If they do expire, here’s the drill:
1. Sell appreciated stock this year rather than next year. Capital gains rates will increase in 2011.
2. If you are self-employed, take advantage of the bonus depreciation and Section 179 expense deduction by buying capital assets next year instead of this year. The president renewed this provision on Aug 5, 2010.
3. Fund your retirement plan.
4. Take retirement distributions now instead of during 2011.
5. Convert your pre-tax IRAs to a Roth IRA account and even though the tax can be split and paid over two years, pay the entire tax in 2010 while the tax rates are lower.
6. This is counter-intuitive to conventional wisdom:
a. Take as much income in 2010 as possible – bonuses, self-employment income, etc. to be taxed at the lower rates, and
b. Defer deductions such as medical, property taxes, and charitable contributions into 2011
I’ve painted a picture for you with some pretty broad strokes. The most important piece of advice I can give you is to get with your tax pro to review your particular situation to
Gustavo A Viera CPA
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