Year-End Financial and Tax Planning Checklist
Like many of you, I have quite a bit of down time between Christmas and New Year’s Day. I use some of my year-end downtime to think about any last minute moves I should make to maximize financial and tax planning strategies for this year and to prepare for the new year.
This is a list of money moves I have done or will be doing before the end of the year.
The safe harbor point depends on your income and how your income is spread out over the year. Generally, if you withheld or paid at least 90% of the taxes you owe for 2008, you are OK. If you made more than $150k in 2008, than you are OK if you paid in 2008 at least 110% of what your 2007 tax bill was. If your 2008 income is less than $150k, then the safe harbor point is having paid at least 100% of what you paid in taxes in 2007.
If you run a tax estimate and determine that you are in a penalty range, see if you can increase your withholding in your final 2008 pay check to remedy the problem. If you pay quarterly estimated taxes, you can make this adjustment for your final 2008 payment on January 15, 2009.
2. Harvest Needed or Desired Tax Losses. There a few trading days left in 2008. Now is a good time to determine (including by following step 1. above) if there are any investments you should sell to capture a capital loss for the year. Keep in mind that in addition to using investment losses to offset any investment gains you realized for 2008 (congrats on that!), you are allowed to deduct up to $3,000 in capital losses from ordinary income. Moreover, losses greater than $3,000 can be rolled over into 2009 and maybe beyond, unless the law is changed.
3. Make Last Minute Charitable Deductions. My practice has been to wait until the end of the year to write checks to charities that we support. If you do this as well, don’t forget! Technically, the check must be written and placed in the mail before December 31 to claim the deduction. Alternatively, you can charge the donation to a credit card and also claim the deduction as of the date of the charge.
4. Prepay or Delay 2009 Deductible Expenses and Income. The general rule used to be that as year-end approached, a taxpayer should accelerate payment of deductible expenses before 12/31 and delay income until after 12/31. That rule – which is intended to delay taxation as long as possible – may no longer apply. For higher income taxpayers, tax rates will likely be increasing in 2009. If you think you will be in an income category targeted for a 2009 tax increase, then it may be to your benefit to wait until 2009 to make your January 2009 mortgage payment and/or pay other deductible expenses. The same logic applies to receipt of any year-end bonuses, etc., that you may have some control over.
Even if you don’t itemize, in 2008 a married couple can deduct up to $1000 in property taxes for 2008. Make sure those are paid before 2009. Normally your mortgage company handles that but if your mortgage is paid-off, you are in charge.
Finally, don’t forget the Hope and Lifetime Learning credits and determining when it is most beneficial for 2009 tuition, etc. to be paid.
5. Capture 2008 Capital Gains. You may be approaching a point in your retirement planning or “fear of investment” cycle that you feel the urge to sell some stock or mutual fund winners and move those gains to a more secure investment. If that applies to you, consider capturing those gains in 2008. I would not be surprised if the low capital gains rate for 2008 is increased in 2009, at least for those with higher incomes.
6. Adjust 2009 Withholdings. Your employer may routinely ask you to update your federal income tax withholding information by requesting that you fill out a new form W-4. If not, you should look into the situation anyway. As one example, many baby boomers are losing dependents as children graduate, find jobs, and move out. If this happened to you in 2008, it can affect your tax situation because you can no longer claim them as a dependent in 2009. Sometimes the reverse can happen if, for example, you become financially responsible for a dependent parent. Either way, take a look at your 2009 withholding levels so that you do not end up under-withholding or giving the government an interest-free loan.
7. Kiddie Tax Adjustments. Congress made some changes to the “kiddie tax” in 2008 which could impact baby boomers. The kiddie tax causes a child’s income that exceeds a dollar threshold ($1800 in 2008) to be taxed at the parent’s marginal rate. Below that, the child’s tax rate applied, such as 0% on capital gains. Until 2008, the “kiddie tax” applied to children 13 and under. Unfortunately, Congress raised the age in 2008 to age 19, and age 24 if a full-time college student. Thus, it is much harder to lower your taxes by shifting investments to your children. You can still gift investments to your children without paying gift taxes (up to $12,000 per parent) but the income in excess of the threshold will be taxed at your rate. So keep that kiddie tax change in mind in your tax planning.
These are some financial and tax planning moves I am considering at year-end. What about you?
Image credit: T. Al Nakib
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