9 End-of-Year Money Moves

What you need to do now to save money when you file next year’s taxes.
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Consider a Roth IRA or Roth 401(k) Conversion

Up to now, households with a combined income above $160,000 were ineligible to convert traditional retirement accounts to Roth accounts. But in 2010, income limitations were eliminated. As a result, conversions to Roth IRA accounts are up 400 percent, according to Fidelity Investments. Roth IRAs do not have mandatory distributions (in a traditional IRA, distributions must start at 70.5 years old), which makes them appealing for people who plan to leave the money as an inheritance rather than rely on it for retirement, says Lew Dymond, principal in the Wealth Counsel. Since taxes on conversions are expected to increase in 2011, "it makes sense to convert this year if you are planning on leaving your IRA to your children," he says.

Give Gifts of Money

The Generation-Skipping Transfer Tax, which was 45 percent in 2009, has lapsed this year. This means you can transfer an unlimited amount of money without being taxed to either a non-relative who is more than 37.5 years younger, or to a relative who is more than one generation younger (like a grandchild). Since the GSTT is expected to return to 55 percent in 2011, you may want to be extra generous this holiday season. "If you have grandchildren, give them money this year while there are no tax consequences," says Bob Williams, senior fellow at the Tax Policy Center. Even if grandchildren aren’t yet on your family tree, giving gifts to children, other family members or friends also carries tax benefits this year. The gift tax is currently 35 percent but is expected to rise to 55 percent next year. Or you can avoid the gift tax all together by capping your generosity at $13,000 ($26,000 if you give as a couple)-the maximum amount one person can give another without triggering the requirement to file a gift tax return with the IRS.

Purchase Energy-Efficient Appliances

If you bought an energy-efficient appliance for your current home in 2009 or 2010, you may be able to receive 30 percent of the cost back as a tax credit. Certain Energy Star-approved appliances such as stoves, HVAC systems, insulation, roofs, water heaters, windows and doors are eligible for a combined two-year maximum credit of $1,500 per household. But don’t necessarily rush out to buy a new appliance before December 31, says Kathy Pickering, executive director of The Tax Institute at H&R Block. "If you need a replacement, consider getting one before the end of the year," she says. "But the savings aren’t large enough to buy something just because." For more information on what items are included in the tax credit and how to apply for one, visit energystar.gov.

Coordinate Your Charitable Donations

Charitable donations to any 501©(3) tax-exempt, non-profit organization must be postmarked by December 31 to qualify for your 2010 tax return. If you have donated money or goods, start gathering those receipts now to submit in April, Pickering says. Also eligible: out-of-pocket expenses you may have run up while you were volunteering. These could include the miles you drove to a volunteering site (you can get back $0.14 per mile) or the ingredients you needed for your child’s bake sale.

Max Out Your Retirement Accounts

The money you contribute to your 401(k) and other retirement accounts is not part of your taxable income when you file your return in April. To minimize the amount of income tax you owe, contribute as much as you can by December 31. People under 50 can contribute $16,500 every year; people over 50 can pitch in an additional $5,500. "But make sure you aren’t exceeding those limits," says Gerri Willis, host of the Willis Report on Fox Business Network. If you don’t withdraw any excess money by April 15, it will be subject to a six percent tax penalty. People who have worked for multiple companies this year and have had more than one 401(k) account open should be especially careful: If you haven’t moved your savings to your new company’s plan, remember to add the totals from both accounts together.

Sell Off Stocks to Maximize Capital Gains

Capital gains taxes are 15 percent this year, but they are expected to go up to 20 percent in 2011. That makes this year a good one to cash in assets that have appreciated and rebalance your stock portfolio. If you invested heavily in the stock market and have large capital gains on stocks you’ve owned for more than a year, consider selling before December 31. If you still want to own shares in the company, you can buy the stock again immediately, without any penalties, to have a fresh start in 2011. (If you sell off your capital losses, you must wait 30 days before purchasing again in order to claim your loss.) To avoid paying capital gains taxes all together, consider giving the stock to your grown children. If your child is over 24 and still in school or over 19 and out of school (and earning less than $34,000), she is exempt from capital gains taxes this year. This means you can give her your stocks and she can cash in tax-free.

Give or Receive Bonuses Early

If you expect to take in any type of pay in addition to your regular income, try to make arrangements to get the money before the end of the year, Willis says. Since income tax rates will rise at least 3 percent unless the Bush tax cuts are extended, you’ll pay a higher tax rate on your 2010 returns if you don’t get the cash until 2011. Business owners who plan on distributing money will also benefit from doing so before the end of the year. Currently, the top tax rate on dividends is 15 percent, but that is set to expire on December 31. It will cost your company more if you you wait until 2011 to distribute dividends: the tax is estimated to rise to 39.6 percent, or 20 percent if Obama’s proposed budget passes.

Take Advantage of College Tax Credits

The American Opportunity Credit-which provides a tax credit up to $2,500 per college student-is set to expire at the end of the year. But that doesn’t mean you have to count that money out for the spring semester. If you prepay at least $4,000 of next semester’s tuition or purchase textbooks before the end of the year, you can receive the tax credit, Pickering says. Like contributions to a 401(k), the money you put into your child’s 529 college savings plan isn’t subject to income tax. To avoid the anticipated tax hike, deposit as much money into a 529 as you can by the end of the year, Williams says. Check your plan; every state has a different limit. If you don’t have a 529 plan, find the best one for your family here.

Fund Your Small Business

In late September, Obama signed the Small Business Jobs Act of 2010 into law, which provides several immediate tax breaks for small businesses. If you are trying to make your start-up dream a reality, know that companies can now deduct up to $10,000 (instead of $5,000) for start up expenses on a 2010 tax return. The bill also increases the amount of money you can write off for capital investments like machines and equipment from $250,000 to $500,000. These deductions can be applied retroactively for any purchases made in 2010. So if you have saved your receipts, you can count computers, servers, storage devices and other equipment towards deductions for your tax return. MORE: Yes, You Can Still Retire MORE: Scared to Invest? How to Overcome Your Fear

First Published Mon, 2010-10-18 10:49

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