• Tax Strategies
  • Year-End Tax Considerations

    by Charles Rotblut, CFA

    The fate of the Bush tax cuts was unknown at press time, as Congress had just reconvened. A compromise that would temporarily extend all tax cuts, including those for high-income earners, was being discussed. Thus, be sure to look for any legislative changes before making year-end tax planning decisions.

    Even with the uncertainty, there are factors that, depending on your financial situation, may need to be considered before year-end. Here are some that might be most pertinent to AAII members.

    Roth IRA Conversions

    As stated in the Briefly Noted column in this issue, investors can delay paying taxes on Roth IRA conversions until 2011 and 2012. The requirement is that a traditional IRA must be converted to a Roth IRA by December 31, 2010. Starting January 1, 2011, taxes on a Roth IRA conversion are due the same tax year that the conversion is made. See IRS Publication 590 for more information (all IRS publications are available at www.irs.gov).

    Required Minimum Distributions

    Individuals age 70½ and older must take a distribution from their retirement accounts by December 31, 2010. (This requirement was waived in 2009.) These accounts include 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs, SEP IRAs, SARSEP IRAs, SIMPLE IRAs and Roth 401(k) plans. Roth IRA plans are exempt while the owner is alive. IRS Publication 590 provides more details, including information on how to calculate the required withdrawal.

    Year-End Security Sales

    As Julian Block explained in the September 2010 AAII Journal (“Capital Pains: Rules for Capital Losses”), investors can deduct up to $3,000 of capital losses from their taxes. Keep in mind that the limit only kicks in after capital gains have been fully offset. Furthermore, amounts exceeding this cap can be carried forward to future years. IRS Publication 550 covers investment income and expenses.

    Estate Tax and Inherited Assets

    There was no estate tax this year, but if property was inherited and sold in 2010, two numbers need to be calculated to determine the property’s tax basis. The first is the price paid by the deceased. The second is a step-up value of $1.3 million. (Surviving spouses are eligible for an additional $3 million, bringing the total step-up value to $4.3 million.) See IRS Publication 950 for more information.

    Alternative Minimum Tax (AMT)

    Congress had yet to address the alternative minimum tax (AMT) “patch” for the year 2010 at press time. This means that the 2010 exemptions are $33,750 for single filers, $45,000 if married filing jointly or qualifying widow(er), and $22,500 if married filing separately. All of these amounts are significantly lower than the 2009 exemptions. Even the IRS expects these exemptions to be increased, but there is no guarantee. Check IRS Form 6251 for updated information.

    Other Factors

    Among the many components of tax legislation are personal income, capital gains and dividend tax rates. If no compromise is reached, all three rates will rise. Keep in mind that even if some type of extension does pass, the timing will be important. The IRS will need to update its tax tables, and payroll companies will then need to adjust their databases accordingly to prevent workers from incurring a temporary reduction in take-home pay next month.

    If you use a tax guide or tax software, be sure to check for updates. J.K. Lasser’s Your Income Tax 2011 guide has several notes reminding readers to go to www.jklasser.com for updated e-supplements. TurboTax and its competitors are likely to provide downloadable updates. Finally, be sure look at the date of any IRS publication before using it.

    Pending action by Congress, my intention is to run our 2010 Tax Guide in next month’s issue of the AAII Journal.

    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


    Raj from OK posted over 6 years ago:

    Your statement said that taxes on Roth conversion done in 2010 may be paid in 2011 and 2012 . This is rather confusing to me . Because , one pays 2010 income taxes in April 2011 any way . Do you mean that we will pay the taxes on only 1/2 of the conversion amount in April 2011 and the other half in April 2012 ?

    Please elaborate on this issue . I talked with some of my friends and there is a lot of confusion in their minds too .

    Thanks .

    Raj Phansalkar

    Bruce from WI posted over 6 years ago:

    The article would better read if it stated that income from a Roth conversion can either be included in 2010 income, or as an option included as income 1/2 in 2011 and 1/2 in 2012.
    If you are making a major conversion one possible planning tip is to make multiple conversions rather than just one so that you have the option of reporting income over all three years if that works out better. Also it is likely that by the 2010 due date (4/18/11)we should know what the US tax rates will be in 2011.

    Robert from NY posted over 6 years ago:

    To clarify the IRA distribution statement, your 70th birthday must occur prior to 6/30/2010 in order to be required to take a minimum distribution in 2010. Is that correct?

    Robert from NY posted over 6 years ago:

    To clarify the IRA distribution statement, your 70th birthday must occur prior to 6/30/2010 in order to be required to take a minimum distribution in 2010. Is that correct?

    Robert from NY posted over 6 years ago:

    When calculating the distribution amount (which is based upon remaining life expectancy), when is the basis for total value calculated? For instance, if one took the minimum distribution on 1/1/2011 based upon the market value of the total tax deferred accounts on 1/1/2011, and sometime later during the year, the total value of the original tax deferred accounts declined, could one return the difference between the value taken on day 1 and the amount that would have been taken on the declined value date and still meet the requirements of the minimum distribution calculation?

    Charles Rotblut from IL posted over 5 years ago:

    Robert - The IRS states that an "retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired."

    Regarding the balance upon which the RMD is based on, the IRS explains, "Generally, a RMD is calculated for each account by dividing the prior December 31st balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590, Individual Retirement Arrangements (IRAs)."

    The IRS has a document regarding RMDs on its website:
    Retirement Plans FAQs regarding Required Minimum Distributions

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