What does the future hold for U.S. taxpayers in 2011 and beyond? While there's no crystal ball to accurately answer that question, it's likely that Congress will tackle our taxes now that the midterm elections are behind us. And, with current tax and legislative headwinds trending toward higher personal income tax rates, it's time to talk taxes with your financial and tax professionals. Together, you can evaluate ways to potentially minimize your current tax situation and fend off future tax exposure - before 2010 ends.
Tax tactics for uncertain times
Portfolio allocation: The volatile financial markets may have thrown your portfolio allocation out of line. Year-end is a good time to check your asset allocation, and - just as importantly - to reassess your long- and short-term goals in light of any changes in your life and the financial markets.
Retirement: High-income investors now have the opportunity to convert assets from a traditional IRA or employer-sponsored retirement plan to a Roth IRA. With a Roth account, the retirement assets you are working hard to build now will one day become retirement income, free of tax.
To help you decide whether a Roth IRA makes sense for you, your financial adviser can prepare a Roth Conversion Analysis. This report will show you the after-tax potential future value of your IRA balance, comparing the outcome of your current traditional IRA with that of a Roth IRA. You'll also be able to see the planning advantages of "stretching" a Roth IRA over multiple generations and the benefits of including income from the conversion over the next two years.
Consider the advantages of a Roth conversion in 2010. You'll have the option of paying the conversion taxes now, at a potentially lower rate, or spreading the tax payment across two years by including half the income in 2011 and half in 2012 at rates in effect in those years.
Gifting to individuals and charities: After 2010, unless there is legislation to the contrary, estate taxes are scheduled to return to rates that are higher than they have been for many years. If you plan to leave an estate to your heirs, you may want to strategically transfer assets this year, free of gift tax, rather than later, when they may be subject to the higher estate tax rates.
• In 2010, you can gift up to $13,000 ($26,000 for a married couple) free of gift tax to an individual or noncharitable entity. You can accelerate your gifting in the current year; for instance, by contributing to a 529 college savings plan you can remove up to $130,000 (jointly) from your taxable estate.
• If you want to use appreciated stock to make a charitable donation, do so before year-end to qualify for a potential income tax deduction this year and avoid paying any applicable capital gains taxes on the appreciation. You can also arrange to contribute long-term appreciated stock to a donor-advised fund, which is a relatively low-cost, flexible way to manage charitable giving.
Tax Credits: If you made energy-saving improvements to your home this year or purchased a new home by April 30, 2010, (if you entered into a binding contract by April 30, 2010, you needed to close - go to settlement - on the home on or before Sept. 30, 2010), you may be able to claim a tax credit that could reduce your tax liability dollar-for-dollar.
Review your receipts for home improvements with your tax professional to see if you qualify for these credits.
Business owners: Like individuals, business owners need to prepare for possible tax increases. They may also be affected by the Small Business Jobs Act of 2010, which extends the depreciation bonus for a year, among other provisions.
Business owners may want to revisit certain strategies - including when to take capital gains and losses and whether or not to make installment sales - in light of possible tax increases.
The extension of the 50 percent depreciation bonus may allow some companies to preserve or increase cash flow by reducing their current tax liability.
If your company has a 401(k), 403(b) or 457(b) plan, you may be able to offer employees the opportunity to convert their existing retirement account to a Roth account. Review your plan document or check with your attorney or your plan provider to see if this is an option under your plan.
• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.email@example.com or 689-8704.