FINANCE: Year-End Tax Advantages for 2011

By Patricia Kummer
Posted

This year is quickly coming to a close. There are only a few weeks left to make changes for the tax year. Here are some guidelines to help reduce taxes now or in the future.

2011 may be considered the most volatile stock market year in recent history. If you followed our tax planning from last year, you would have taken tax losses from unwanted investments. You can now use up some of those losses that carried forward and adjust your portfolio once again. Tax loss harvesting remains a good tax saving strategy and may spruce up your portfolio for the coming year.

You can take up to $3,000 each year as a loss against your ordinary income or 100 percent of losses against investment gains. Therefore, if you have significant gains now or in the future, any left-over losses can be wiped out at that time. This can be a great strategy that helps recover some of the investor's losses through tax savings.

You may lucky enough to have gains to be concerned about that may exceed any losses. If so, keep in mind 2011 is still a good year to realize capital gains at the 15 percent limit or lower depending on your tax bracket. Consider realizing capital gains in a low tax year to step up your cost basis for future years when your taxes may be higher.

Retirees over age 70 can still take a distribution directly from their IRA to a charity to avoid taxes on the distribution. This works well for those who no longer itemize and still want to contribute to a good cause.

You may also consider converting a traditional IRA into a Roth IRA. While individual situations vary, this would be a good year to volunteer to pay the taxes on the depressed price of the IRA assets and convert them into a Roth at current tax rates. Even though the income limits are now waived for conversions, even high wage earners may feel this year has potentially lower tax rates. Distributions after age 59 ½ are tax-free if the Roth account is held for five years. This pushes the future gain into a tax-free status which could last a lifetime or longer to a beneficiary.

Review your accounts at work and maximize your pre-tax contributions. This will help to reduce your taxable income for the year and you could put more money to work. The maximum contribution this year is $16,500 in a 401k with an extra $5,500 catch-up if you are over age 50. Beginning in 2012, these numbers have been indexed up to $17,000 with the same catch-up provision.

Self-employed individuals may have a better advantage if they have the cash flow to fund their individual 401k accounts up to $49,000 plus a catch-up. The plan must be opened by year-end which may be different than other self-employed plans.

Set aside some money to fund a Roth IRA between now and April 15th if your joint adjusted gross income is less than $177,000 for joint filers or $120,000 for singles. The contribution limits this year for all IRAs are $5,000 or $6,000 for those over age 50.

Parents or relatives funding a college plan that is eligible for the state income tax deduction may want to maximize their contribution before year-end. You can put in up to $13,000 per child without filing a gift-tax return. This works for kids already in college and need more funding for future years as well.

Review your spending for 2011 and plan a budget for the New Year. Plan early to have enough savings to fund retirement and college. Meet with your advisor to design a strategy for the future which may include rising taxes and inflation. The new world economy may require a different investment strategy in the coming year.