CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS |
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8 YEAR-END
TAX-SAVING STRATEGIES The end of the year is fast
approaching—and so are several important December 31 financial deadlines. Here
are eight financial to do’s you may want to carry out before the year ends. Convert to a Roth IRA.
With many individual retirement accounts decimated by the bear market, taxpayers
may find this the perfect time to convert their traditional individual
retirement accounts to a Roth IRA, whose eligible earnings are not taxable upon
withdrawal. Because you pay regular income taxes on the money you shift to a
Roth, the idea is to convert the smaller pool of assets into a Roth before the
assets rebound in value. Furthermore, taxpayers who
couldn’t qualify for a Roth conversion before because their income was too
high (over $100,000 for couples and singles) may qualify now if their income is
down for the year. You must take the money out of the traditional IRA by
December 31. The hitch to all this? It’s better to pay for the conversion
taxes with money outside of the IRA—potentially difficult in a bear market. Open a solo 401(k) plan.
The self-employed and business owners with no full-time paid employees should
consider opening a solo 401(k). The 2001 Tax Relief Act made changes to 401(k)
plans that make individual 401(k)s cost effective for the first time.
Participants can now sock away up to $41,000 to be put into these accounts in
2002, far more than alternatives such as the SIMPLE IRA or SEP IRA. For 2002,
the 401(k) must be opened by this December 31 if you follow the calendar year. Begin required retirement
plan distributions. Did you turn 70 1/2 before July 1 this year? You’re
required to start taking minimum distributions by December 31 from your
traditional IRA and employer-sponsored retirement plans (except for the plan of
your current employer if you’re still working). Technically, you can delay the
initial distribution to April 1 of next year, but that means you’d have two
required withdrawals next year because all subsequent withdrawals must be
completed by December 31. Two minimum distributions in the same year could push
you into a higher tax bracket and potentially expose more of your Social
Security benefits to tax. Pay attention to mutual fund
distributions. You could face the irony of paying taxes on capital gains
distributions made by your taxable mutual funds even though the funds lost money
for the year. If it’s a fund you want to sell anyway, consider selling it
before the “ex-dividend” date, which commonly is in November or December.
Equally, if not more important, avoid buying into funds before they make their
distributions—otherwise you’re paying taxes on gains you never earned. Review investment
gains/losses. Now is the time to consider selling losing investments to
offset those scarce investment profits you made in 2002, or selling profitable
investments so they are sheltered by losses you’ve already realized (and
perhaps rebuying those profitable assets if it makes investment sense). If you
don’t have profits to offset, you can use losses to offset regular income up
to $3,000 (the excess losses carry into future tax years). Bunch deductions. A
time-honored tax strategy is to bunch deductions into a single year. For
example, you might accelerate payment of your second installment of property
taxes due next spring into this year. The same for next January’s payment for
estimated taxes. Bunching elective medical expenses such as orthodontia bills
also might push your total medical deductions over that often difficult to
hurdle 7.5 percent threshold. Consider charitable
deductions. Consider increasing charitable contributions in higher income
years, or delaying the donation of investments until they regain some of the
appreciation they have lost—you’ll receive a larger deduction when you do.
(Be to donate appreciated assets rather than selling them first.) College-bound strategies.
Families may want to postpone into 2003 the receipt of income such as bonuses if
they will be applying for financial aid in 2003 (the aid would be calculated on
the family’s 2002 income). Or they may want to accelerate income from 2003
into 2002 if they anticipate applying for aid in 2004 (which would be based on
2003 income). Because some of these strategies
are complicated and may even conflict with each other, be sure to review them
with your financial planner or tax advisor. October 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLP, a local member in good standing of the FPA. |
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