Last Minute Tax Moves

First, if you are employed by a person willing to hold off on paying you your last pay check and bonus that may be due you this year, you can shift this income to next year.

If you run your own business, and are on a cash basis, by holding off sending out the final bills of the year just a few days, you’ll avoid having a fast paying customer send you income in 2011. These strategies work best if you find that you will be in a higher bracket than usual in 2011 and benefit from this income shift from one year to the next.

Another thing to consider is if you have stocks currently selling below your cost, you can take up to $3000 in losses against ordinary income. Losses first offset gains, thus you may just benefit by the favorable capital gain tax rate, not your full marginal rate, with any losses beyond $3000 still remaining used to offset future gains. Ginita Wall’s Harvest Time for Tax Losses offers the full details of this tax saving strategy.

Next, let’s focus on the itemized deductions you may be able to take advantage of. Some of the more common Schedule A deductions include Real Estate Taxes, Home Mortgage Interest, Home Equity Line Interest, State Income Tax, and Charitable Donations.

It’s possible that you are not able to itemize as you’re not above the standard deduction amount for this year, $5,800 single/ $11,600 joint. By pulling in some of the payments within your control, you may find you are able to get over that threshold and itemize every other year.

The real estate tax bill may be due Jan 1, but payable by Feb 1. This is an opportunity to pay it in December and add those dollars to this year’s deduction. Similarly, the next mortgage payment, due Jan 1, contains the payment for December’s interest. By making this payment by Dec 30, you’ve just pulled that deduction into this year. For the philanthropic readers, you may consider pulling in much of your 2012 charitable donations into 2011.

If you’ve always been close to itemizing, this strategy alone can help make those donations deductible. To put it simply – you’d make your donation in January and December of the odd number years only. The charities will see the same money coming in, but to the IRS you’ve become an every-other-year itemizer.

Another tax saving trick for this year – the Charitable IRA Contribution. Unless Congress extends this ruling again, 2011 is the last year those who are 70-1/2 or older can direct IRA administrators to send an IRA withdrawal directly to a charity of their choice.

There are multiple benefits to this strategy, for those who are charitable, but don’t itemize, the tax benefit of the donation is lost. Since this contribution counts as an RMD (Required Minimum Distribution) but is not included as income to the IRA holder, the benefit of avoiding taxes on that contribution is back. If the amount donated is greater than the RMD, it helps reduce the future RMDs by reducing the account balance.  The provision allows individuals 70-1/2 years and older to exclude up to $100,000 of their qualified charitable distribution from gross income until December 31, 2011.

Last – you have until April 17th to fund your 2011 IRA. $5000 if you are under 50, or $6000 if you are 50 or older in 2011. It’s deductible if your MAGI (modified adjusted gross income) is under $56,000 if you are single and $90,000 if you are married filing jointly.  Your IRA contributions are reduced or phased out once you reach these income limits.

You can also check out the TurboTax tax calculator or TurboTax online if you want to see how your taxes will be impacted by making these tax moves.

Look at the list and see which ones appeal to you. Focus on completing one before you move on to another task. It’ll increase your chances of keeping your financial goals.

1. 1. 1. Catch up on your bills. Before you can make progress on your finances, make sure you’re all caught up on your bills.
      2. Start an emergency fund. Get your family on more solid ground, by having 3-6 months of expenses tucked away in the emergency fund. The easiest way to get start is to set up an automatic transfer from your checking account into your savings account. While getting a good interest rate is fine, it’s not the main priority – you want it in an account that you have easy access to when you need it.
      3. Hide your credit cards. If you’re having a hard time with your credit card debt, then do yourself a favor and keep them out of your wallet. The temptation of using plastic to buy stuff and put you further into debt is difficult for some. You may surprise yourself with how much money you saved in your first month.
      4. Negotiate and lower the interest rates. Don’t settle for what your credit card companies are charging you, see if you can lower your interest rates. If you’ve received offers for lower rates, mention that to the customer service representative. Don’t be rude or threatening, but be firm and polite. I’ve managed to lower my interest rates using this method.
      5. Tackle your debt with a snowball strategy. Now that you’ve managed to go ahead and get some better rates on your cards, you can have more of your payments go towards paying down the principal. First choose your smallest balance credit card and pay the most you can on it while paying the minimum on the rest. After you pay that card off, move that money into your next credit card and repeat the process. Even if you don’t pay all of your debts off in 2011, you’ll knock some of them out, giving you some peace of mind.
      6. Create a realistic budget. Be honest- when’s the last time you’ve stuck to your budget? For many, it’s been a while and a big culprit is an unrealistic budget. For most people, you have to include some buffer with your estimates. If you’re having a hard time keeping track, use free tools like Mint to help you see spending trends and create budget reminders.
      7. Start or increase your retirement contributions. Now is the time to get start if you haven’t already. The earlier you start investing for retirement, the more compound interest is on your side.
      8. Plan a debt-free vacation. Everyone needs a break and taking a vacation can be the way to go, just make sure you don’t into debt for it. It’s January so you have plenty of time to save up for a summer or fall trip without breaking your budget. Set aside a small amount each month to go towards your vacation fund. As deals pop up, take advantage of them and prepay for it.
      9. Negotiate a raise at work. You got the talent and you’ve helped your company weather the financial storm. Make sure you get the recognition you deserve by presenting a case for your next raise. Be well prepared and include numbers, showing how valuable you are. You may surprise yourself with the results.
      10. Clean out your clutter and make some cash. If you’re in dire need of spring cleaning, do yourself a favor and see if you can boost your savings by selling your old stuff. Take advantage of Craigslist and eBay or go ahead and have a garage sale. You’ll have more space at home and more money in your wallet. If you don’t have time to sell your old stuff, consider donating it to charity for a bigger write-off on your tax return next year.
      11. Get your taxes done right. Filing your taxes is not the time to fumble around. Having your taxes filed correctly can relive stress, reduce your tax burden, and in some cases increase your tax refund. It might sound a bit self-serving on this blog, but TurboTax makes it easy and guides you through the process of getting those taxes done on time.

Thoughts on Finances in 2011

Those are just some ideas I’ve had for this year, what are yours? What are you doing to get your finances in order this year? What success have you had so far?

Two big considerations will drive action in D.C. this year – the economy and the budget deficit. Obviously these actions will affect your tax situation. So, let’s discuss what we know today and what is scheduled to change in 2011. And keep in mind, this is not only about tax planning for 2010, but for years beyond.

Expiring Tax Cuts

In 2001 and 2003, tax breaks were enacted that are scheduled to expire in 2011. These breaks consisted primarily of reducing the top tax rates on capital gains, dividends and all other income.  If no legislative action happens to reverse these expiring tax cuts, taxpayers will see the following tax rate changes in 2011:

From  (2009 tax year)    To (2010 tax year)

Capital gains:        15%   ->     20%

Dividends:             15%   ->     39.6%

Income:                  35%   ->    39.6%

These are substantial increases across the board. Fortunately for some, these increases may apply only to the wealthiest Americans (> $200,000 single or > $250,000 joint). Regardless of what happens, many believe that top tax rates will go up.

Therefore, now is the time to evaluate your income portfolio to determine if it’s time for asset reallocation. For example, consider shifting those dividend generating investments into capital gains generating investments. While this transaction may create a taxable sale now, you’ll be paying tax on those gains at a rate lower than what it may ultimately be in 2011. On the other hand, if you expect to sell at a loss, consider shifting the sale into 2011 where those capital losses will be more valuable if rates go up.

Lastly, if Congress does nothing about the alternative minimum tax (AMT) this year, 24 million additional Americans taxpayers will face paying the AMT this year. This scenario has played out each year for the last few years. What we have learned is that Congress generally acts on this “stealth” tax at the last possible minute to mitigate its impact.

And finally, the estate tax uncertainly still exists. While there is no estate tax at least for now, it is scheduled to come roaring back in 2011 at a rate of 55%. The exemption amount is $1 million. Obviously, the lack of certainly in this area makes planning difficult.

In summary, while no action has been taken yet on tax legislation for next year, it is prudent to keep an eye on it so you can anticipate its impact on your bottom line. Although I can’t predict what Congress will do with specific legislation, I think it’s safe to assume that high income taxpayers will see higher tax rates in the future. Use this as a guide for beginning your tax planning in 2011, and check back with us often as we’ll keep you updated here on tax changes you need to know about.