Year-End Tax Considerations
Charles Rotblut will speak at the 2015 AAII Investor Conference this fall; go to www.aaii.com/conference for more details.
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“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.
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.