It's hard to believe we are in the fourth quarter of 2009 and must gear up for our year-end tax planning. You may have seen the joke about the "new 1040" tax return that has only two lines to fill in, which read: 1. How much did you make last year? 2. Send it in! This may be a joke now, but with the new administrations "wealth redistribution" view of future tax codes, it may soon feel like a reality. The top 5% of taxpayers in the country will feel the brunt of it.
Before you start getting involved in all the holiday festivities coming up, the best course of action you can take right now is start analyzing the information you will need to complete your 2009 tax return. If you wait until you receive all your W-2's, 1099's, and corporate K1's, it may be too late to take the action necessary to lower your tax liability.
Tax harvesting, selling poor performing assets at a loss to offset better performing assets at a gain, is one of the many valuable services advisors can offer their affluent clients. Although this topic should be discussed at all investment reviews with your financial advisor throughout the year, it is most important to see what can be done to lower your taxable income before December 31st of the current tax year. This works especially well if you have high tax loss carry-forwards from the market crash of 2008.
It is not difficult for most tax professionals to estimate projected income for a client, determine year-end dividends and capital gains or losses, and tax write-offs to establish if additional action is needed.
You and your advisors should decide early if it makes sense to add the maximum allowable contribution to retirement plans. If you own a business, your retirement plan should be analyzed to see if it gives you the best tax advantages. There are many different types of corporate pension plans with different contribution limits. Some plans have changed over the last few years and your existing plan may be antiquated for your current needs, especially if your income has increased dramatically this year. Some plans require that you establish them prior to December 31st, even if you have until April 15 of next year to add to it for the current year. It also makes sense to put away retirement money as early as possible in order to benefit from the tax-deferred growth for as long as possible.
For those readers who receive performance based bonus', it would be wise to determine whether that bonus should be paid before year end to be included on your 2009 tax return, or held off until after January 1st and included in your 2010 tax return. Normally, I would recommend holding off bonus' to the next tax year depending on various factors. As we look into the future, however, there is a very good chance the maximum tax bracket will increase from 35% to 40% or higher for wealthier Americans. If you are always in the highest tax bracket, this year could be the year you pay the least taxes, and possibly 2010, if the current tax codes are left as is.
Reducing estate taxes is very important to investors with an especially high net worth, and they spend a lot of time with their financial and estate planning advisors to learn ways to minimize what may seem to be one of their biggest liabilities. I would recommend spending the same energy and time on mitigating your income taxes as this is an annual tax that most people end up overpaying. If you add up all the years you may have overpaid your income taxes, it may prove to be a greater liability than the final estate tax bill. There are many creative ways to pay the estate taxes using properly executed trusts and life insurance strategies allowed by the IRS. There are no creative strategies to help pay for income taxes, which makes it more important to take the time to plan for tax avoidance.
Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Management Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor
and Ten Easy Tests for Finding the Best One
. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit www.daviswealth.com
, or email: email@example.com.