2009 year-end tax tips
Sunday, December 20, 2009
The days of 2009 may be dwindling to a precious few, but there is still time for taxpayers to check over this year's finances and possibly save themselves some money when they file their tax returns in the spring.
This year, though, figuring out the best strategy is even more complicated than usual.
First, Congress has fiddled with the law. Lawmakers almost always do this, but this year they have been adding, subtracting and sunsetting items so often that the tax code's provisions are blinking on and off like the lights in Times Square. Taxpayers have to hustle to take advantage of some that expire at the end of the year. Others continue for another year or more, while still others that were set to expire have been extended.
At the same time, the crippled economy and bouncing stock market have left many taxpayers with an unfamiliar collection of gains and losses that offer planning opportunities, but those situations require careful analysis for best results.
Taxpayers "need to look, not just internally at their finances and tax situation, but even more so than in other years look externally at what changes are coming," said Barry Glassman, president of Glassman Wealth Services in McLean.
The result is that the usual rules of thumb may work for some people but not for others.
For example, conventional wisdom holds that taxpayers should, when possible, accelerate deductions into the current year while deferring income into the next. The premise here is that a dollar saved today is worth more than a dollar saved tomorrow, and so cutting this year's taxes is better than cutting next year's, even if the amounts are the same.
Roth IRA conversions
But there's a new twist next year that you should be aware of: Beginning in 2010, the government will let you convert a traditional individual retirement account to a Roth IRA regardless of how high your income is.
For many people -- but not all -- such a conversion has significant advantages. Withdrawals from a Roth IRA are generally tax-free, and there are no required minimum withdrawals, as there are with traditional IRAs when the account owner reaches age 70 1/2 . This means older people can leave money in a Roth account to grow tax-free. Also, a Roth IRA can be used in estate planning to bequeath an heir a lifetime stream of tax-free income.
If a taxpayer converts a traditional IRA (or part of one, which is allowed) to a Roth, however, he or she will owe tax on the earnings and deductible contributions that get shifted into the Roth. A special provision in effect next year allows this tax to be spread over 2010 and 2011, which can ease the impact.
This trade-off of upfront taxes vs. later advantages makes the decision of whether to convert dauntingly complex, but taxpayers who are confident they want to convert may find it advantageous to move any income they can into this year and push any deductions that can wait until 2010.
A second and more iffy reason to accelerate your income is the looming question of where tax rates are headed. Many analysts expect them to rise, especially the rate on long-term capital gains, which are profits from the sale of assets such as stocks and bonds held longer than a year.