Put year-end strategies into motion

Published 10:37pm Saturday, October 2, 2010

Thinking about your taxes may not be the most enjoyable task, especially around the holidays. But staying on top of your finances as the year comes to a close can make it more tolerable.

Martin Scoll, Vice President of Life Event Services for Wells Fargo Advisors, says it is paramount to start preparing as early as possible. “Good tax preparation and planning starts on Jan. 1,” he says. “Don’t wait until December to start dealing with your year-end planning. Reviewing your finances and giving some thought to your taxes in early Fall will not only keep you ahead of the game — it will also likely save you money.”

Here are some tax-efficient strategies that may help minimize your tax bill:

Create or add to a 529 college savings plan

If you are investing in a 529 college savings plan to help pay a child’s or grandchild’s higher education expenses, consider maximizing your 2010 gifts now. Or if you need to establish a new 529 plan, start the process today. Waiting until the last minute could prevent you from claiming a 2010 state income tax deduction or using your 2010 annual exclusion that lets you gift $13,000 (for individuals) or $26,000 (for married couples) to a beneficiary without triggering gift tax implications. Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.

Prepare for possible Education Savings Account changes

Many significant provisions of the landmark 2001 tax reform legislation are scheduled to “sunset” or expire on Dec. 31, 2010. As a result, Education Savings Accounts (ESAs) are changing in 2011 unless Congress enacts further legislation (which has not occurred as of press time). The annual contribution limit will be reduced to $500 per beneficiary; only post-secondary education expenses will qualify; and the contribution deadline will move back to Dec. 31 of each tax year. Given these changes and others, many ESA owners are considering moving their ESA funds to a 529 plan. This can be done tax-free if you meet certain requirements; check with your financial advisor and tax professional for details.

Make charitable contributions

A charity must receive your cash or stock gift by year end for you to be eligible for a 2010 income tax deduction. If you make a donation by check, the envelope must be postmarked no later than Dec. 31 (assuming the check clears in due course). But if you plan to gift securities, don’t wait until the last days of the year – gifts of securities must be irrevocable by year end to allow for a current-year deduction.

Gift to family members

The same time frames apply – if you are planning to give cash or a check, you may not need a long lead time but checks must clear by year end. If you are considering gifting securities, there are a few things to keep in mind. First, the processing of paper work may take some time, so start early. Next, family members in the 10 percent and 15 percent tax brackets (think adult children and grandchildren or parents you may be supporting) may be eligible for the zero percent long-term capital gains rate in 2010. Obviously, this creates a prime opportunity for you to gift appreciated securities to these individuals for them to sell. However, there are potential pitfalls, such as the “kiddie tax” rules, that you should discuss with your financial advisor and tax professional.

Fund your IRA and/or employer retirement accounts

Maximizing your contributions to retirement plans may reduce your taxable income. You can make IRA contributions until April 15, 2011. But you must complete any salary deferral contributions to employer retirement accounts by Dec. 31, 2010.

Complete your Roth IRA conversion. Completing the conversion of a traditional IRA or qualified retirement plan to a Roth IRA by December 31 will give you the ability to defer the taxable income from the conversion to tax years 2011 and 2012. For 2010 conversions only, you may decide to pay all of the taxes resulting from the conversion in 2010. The default is to have 50 percent of the income included in your 2011 tax filing and the balance in your 2012 tax filing. Your tax professional can help determine which alternative is better for you, especially given potentially higher income tax rates in 2011 and beyond.

Remember that required minimum distributions (RMDs) have been reinstated

If you’re age 70-1/2 or older, you are obligated to take RMDs from your 401(k), 403(b) and similar qualified plans, as well as from your traditional IRAs, by Dec. 31 – failure to do so can result in a severe 50% IRS penalty. There are certain exceptions to this rule, so talk with your Financial Advisor to find out what they are and if they apply to your situation.

To help you determine which of these strategies are most beneficial for your personal financial and overall tax situation, talk with your Financial Advisor and tax professional.

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