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YEAR-END PLANNING — Be Proactive by Beth Jones, RLP®

Taxes in November?

Why are we discussing taxes when tax season seems so far away? There’s no time like the present to take a proactive approach to your current tax situation. Being informed of tax law opportunities will help ensure you make the necessary changes while you can still impact your taxes. Remember, your 2009 tax return may not be due until April 15, 2010, but expenses for tax deductions must be complete by December 31, 2009.

Here are some ideas that will get you started on a path to being fully informed and prepared:

  • REVIEW YOUR FINANCES from the beginning of the year to be sure your income is not outpacing the taxes you currently pay or, adjust your tax withholding if you will receive a tax refund of $1,000 or more. This strategy can put more money in your pocket; be sure to work with a tax professional if considering an adjustment.
  • ORGANIZE YOUR PAPERWORK for 2009 tax return preparation. Locate all necessary receipts and proofs of deductions. Getting a jump on your 2009 tax preparation may put more money in your pocket sooner.
  • INCREASE CONTRIBUTIONS TO YOUR 401(K) PLAN to reduce your taxable income in 2009. Maximum contribution for 2009 is $16,500 plus $5,500 catch-up contribution for those who are 50+ years old. Taxes are deferred until you withdraw funds in retirement.
  • INDIVIDUAL 401(K) FOR SELF-EMPLOYED — If you are self-employed, establish and fund an Individual 401(k) by the end of the year to increase retirement savings and provide a substantial tax break.
  • REVIEW YOUR PORTFOLIO — Are there any tax losses you could harvest by December 31 to create capital losses for 2009? You can use up to $3,000 for 2009 and, any unused losses can then be carried forward to offset gains in future years. You could remain invested by purchasing a like fund and holding for at least 30 days.
  • PLAN CHARITABLE DONATIONS you intend to make by the end of the year, and when you make them, be sure to get proof in the form of a receipt, canceled check, or bank statement, regardless of how small or large the donation. The previous IRS documentation requirement for a single gift of $250 or more expired with the 2007 tax year, and you would be wise to have proof of your donations in case of an audit.
  • LOOK FOR TAX BREAKS — If you need to renovate your home, you could get some tax relief. If you open a home equity line of credit to pay for these items, the interest may be tax-deductible. And if you buy a hybrid car or make energy-efficient improvements, there are hefty tax incentives.
  • REQUIRED MINIMUM DISTRIBUTIONS (RMD) SUSPENDED — For taxpayers age 70½ and older, RMDs from individual retirement accounts and other retirement plans can be skipped without penalty for tax year 2009. The same rules apply to heirs of inherited IRAs.
  • ANNUAL GIFTING TO 529 PLAN — The annual gifting limit for 2009 increased from $12,000 to $13,000. The gifting strategy removes assets out of your estate while avoiding any future taxes if the funds are used for qualified higher-education expenses. The financial aid formula includes 529 accounts owned by the student’s parents, but not those owned by grandparents. For this reason, using a 529 plan is more beneficial from a financial aid standpoint than contributing to UGMA or UTMA accounts, which are considered student-owned assets and weighted heavily in determining financial aid.
  • CONSIDER A ROTH IRA CONVERSION — Converting a traditional IRA to a Roth IRA before year-end while the market is down could result in a smaller tax bill. When the market recovers, and the account appreciates, those earnings will be tax free, assuming that certain conditions are met. *Note that until 2010, clients are not eligible for a Roth IRA conversion if their income exceeds $100,000.
  • LOST YOUR JOB? ROLLOVER TO AN IRA — Don’t take distributions from your retirement accounts until income is needed. 401(k) and 403(b) accounts may be eligible for a direct rollover to an IRA if a “triggering event” applies (e.g., retirement, job change, you reach age 59½). New regulations became effective in 2009, and you may be better served by consolidating retirement assets inside an IRA, which may provide you with more investment choices and control over your account. IRAs may have more tax favorable options for beneficiaries.
  • ENERGY RELATED TAX CREDITS — There are some major changes for energy-related issues, including a more generous tax credit of 30% for the full cost of installing home solar power or geothermal systems. There are new tax credits for small wind turbines for residential or business use and biomass stoves. The solar and wind residential tax credit can be claimed against the alternative minimum tax as well. The new bicycle tax credit allows employers to reimburse employees up to $20 a month for expenses related to bicycle commuting.

If you need assistance in tax planning, consider consulting an independent Financial Consultant to ensure that you’ve considered all the possibilities; they typically take a more holistic approach. Every person’s situation is unique and all changes in tax code should be considered when it comes time to file a return. Consult your tax advisor to address any of your tax needs specifically.

Beth Jones, RLP® is a Registered Life Planner and Financial Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.

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