5 Great Year-End Tax Management Tips

Each week, a certified financial planner or advisor shares tips for managing money and preparing for your financial future. This week’s post comes from Ted Jenkin of Oxygen Financial.

As 2010 comes to a close, we know that there is concern about what will happen with many of the income tax changes in 2011. The important thing is that you take action here in 2010 with the information you know that may help you save short term or long term money in taxes. Here are five things to consider before year end.

1. Make sure you use up and max out your Flexible Spending Account at work.

If you have put aside pre-tax dollars in your employer’s flexible spending account plan for medical or dental expenses, make sure to use it by the end of the year or you’ll lose it! If you know you have upcoming medical and/or dental expenses, it may be wise to fund more dollars in your flexible spending account if you haven’t reached the yearly cap. This will allow you the opportunity to reduce your taxable income for 2010.

2. Match your gains and losses for capital gain taxes in 2010.

You should review both your capital gains and losses for all of 2010. This may include gains and losses for stock, bond, or mutual funds that you have in your non-retirement portfolio. This is especially true because this may be the last year for some time that the capital gains rate is only 15%. In addition, you may have other investment positions where you still have a capital loss, or you are carrying forward a capital loss from 2009. This may be a great opportunity to examine your portfolio and take your capital gains on winners, and match those gains against the capital losses on winners. You can match an unlimited amount of gains against losses. Once losses exceed gains, you can only deduct up to $3,000 of losses against ordinary income in a given tax year.

3. Go Green

There are still great tax credits in 2010 for making an investment to be more energy conscious. Here are the recommended guidelines:

• Must be “placed in service” between Jan. 1, 2009 through Dec. 31, 2010. If you didn’t do this in 2009, you should consider for 2010.
• Must be for taxpayer’s principal residence, except for geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems (where second homes qualify).
• The maximum total of $1,500 can be claimed for all products placed in service in 2009 and 2010 for most home improvements. The exceptions are for geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems which are not subject to this cap, and are in effect through 2016.
• Must have a Manufacturer Certification Statement to qualify.
• For record keeping, save your receipts and the Manufacturer Certification Statement.
• Improvements made in 2010 will be claimed on your 2010 taxes (filed by April 15, 2011)
• If you are building a new home, you can qualify for the tax credit for geothermal heat pumps, photovoltaics, solar water heaters, small wind energy systems and fuel cells. You cannot qualify for the tax credits for windows, doors, insulation, roofs, HVAC, or non-solar water heaters.

4. Look at a non-deductible IRA and converting to a Roth IRA.

Even if you don’t qualify to make Roth IRA contributions or traditional IRA contributions on a before-tax basis, you can still make after-tax contributions to a traditional IRA. In this tax year (2010), you can immediately convert those traditional non-deductible IRA contributions to a Roth IRA. For those under 50 years old, this could allow you in 2010 to put away $5,000 and for those over 50 you could put away up to $6,000.

5. Look at doing a Roth IRA Conversion.

In May of 2006 President George Bush signed a $70 billion tax cut provision that changed the eligibility rules for Roth IRA conversions. Starting this year in 2010, taxpayers with a modified adjusted gross income of more than $100,000 can convert a traditional IRA to a Roth IRA. If you convert, you can elect to include the conversion income in 2010 or spread the income tax bite over two years in 2011 and 2012. Removing the Roth IRA conversion cap doesn’t mean anyone can fund a Roth IRA, but it does mean that anyone can convert an existing IRA to a Roth IRA. With the Small Business Jobs and Credit Act, you may also look at converting your 401(k) to a Roth 401(k) if you qualify under all of the tax rules.

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