'Tis the season for cleaning up tax matters

By Judith McGee

The Daily Record Newswire

This is a good time pf year for a tax planning review. Remember, even in a struggling global economy, Uncle Sam still wants his share of your income. Taxes must be factored in for every financial decision you make.

While we can't control all financial issues, there are some we can - such as the timing of certain transactions relative to income tax planning. Before year-end, pay particular attention to what will be reported on your tax returns. As always, consult with your tax adviser on these matters.

Consider these tips:

* Has your financial picture changed? Is cash flow increasing or decreasing? Should you adjust your withholding or estimated tax payments?

* Can you accelerate or delay income?

* Which deductions should be paid in 2011, and which should be deferred to 2012? I.e., do your deductions for medical bills, miscellaneous investments, charity donations, property taxes, etc. exceed the IRS thresholds?

* Are you taking full advantage of retirement plans? If you're over age 50, or if you are turning 50 this year, consider making a catch-up contribution - perhaps the maximum allowed.

There are some unique aspects of tax planning in 2011 -- some continued from 2010. There is no phaseout of itemized deductions, a benefit for individuals with higher incomes.

Individual and spousal IRA

If you don't have a retirement plan through employment, at least consider putting money into an IRA for yourself, and a spousal IRA for a nonworking spouse.

Children's Roth IRAs

If you have working children, you're allowed to put money into IRAs for them - 100 percent of each child's earned income, up to $5,000. Consider funding a Roth IRA - it's not deductible, but it grows tax-free. Your child should have little to no income tax if income is less than $8,500.

Think of growing money tax-free from age 16 to age 66 and compounding tax-free for 50 years. Can you do the math? A single deposit of $5,000 invested at 7 percent for 50 years is $147,285! Not bad.

Note that this is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

Tax loss harvesting

Review your taxable investment portfolios at year-end. You may need to realign your portfolio to better serve your goals going forward. Rebalancing can address your goals as well as tax harvesting to record losses or recognize gains. Gains and losses can offset each other, and can use additional losses to offset ordinary income up to $3,000 per year. Carry-forward losses can be used in future years against future gains.

The Roth IRA conversion

The adjusted gross income threshold for IRA conversions to Roth IRA is no longer in place, which opens the opportunity to look at a Roth conversion as part of a retirement strategy.

Direct charitable gifts from IRAs

Individuals older than 70? can give up to $100,000 from their IRAs directly to qualified charities as nontaxable events. No separate charitable deduction is allowed. This means potentially assisting their favorite charities with assets they may not need. In prior years, a gift from an IRA required a declaration of the income as taxable before it could be deducted. This pre-distribution direct gift from an IRA is nicely tax-favored.

Donor advised funds

An individual with a high net worth may want to consider a donor-advised fund. Joan has sold her business and wants to deduct a large amount for tax purposes this year. She carves out $500,000 and gives it to her own donor-advised fund. Because the large amount is a one-time event and she wants to continue to help charitable works in the future, the fund may be a good planning strategy. She deducts the entire amount in the current tax year, but donates to various causes over time.

Alternative Minimum Tax

If you're subject to AMT, deductions such as medical expenses, state and local taxes, and miscellaneous itemized deductions may be reduced or eliminated. Ask your tax adviser to test for your exposure to AMT, and ask for an explanation of its nuances.

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Judith McGee is the chairwoman and CEO of McGee Financial Strategies Inc., an independent registered investment adviser. She is a co-branch manager of, and offers securities through, Raymond James Financial Services Inc. in Portland, Ore. Contact her at 503-597-2222 or judith@mcgeenet.com.

Published: Thu, Dec 1, 2011

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