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Get Head Start on Planning for Taxes
The news at midyear 2009 is filled with ongoing financial struggles for individuals and institutions: job losses, stressed banks, market volatility and massive federal debt. Washington is trying to get the country back on track, and at the same time, take on the challenges of healthcare, energy and education.
A stimulus bill was passed in February 2009 and Congress has plans to craft additional tax legislation this year which would include a provision to make the estate tax permanent rather than allowing it to expire for one year in 2010.
Whatever happens, be aware that your best chance of a tax cut for 2009 is to get serious about your own tax planning right now. If you delay planning until later in the year, you could significantly limit your options. A good place to start your 2009 tax review would be to focus on your various retirement accounts, regardless of your age.
Required minimum distributions (RMD’s) from certain retirement accounts for account holders over age 70 ½ have been waived in 2009. Lower withdrawals translate into lower taxable income, so choosing to forgo the rest of this year’s distributions could reduce your income tax.
If you need the supplemental income that has previously come from your RMD, consider taking that distribution from another non-retirement account. For example, cashing in a low interest paying certificate of deposit could preserve your IRA and eliminate the taxable income that an RMD generates. Using this option instead of taking an RMD may also decrease the taxable amount of your social security benefits, which in turn, could put you in a lower tax bracket.
This may also be a good time to review the option of converting a traditional IRA to a Roth IRA, assuming that you are below the $100,000 adjusted gross income limitation. Keep in mind, you will have to pay tax on the amount converted. While I often caution clients who are considering this option, one argument for making the conversion now and paying the tax is that the current tax may be lower on a reduced value in your IRA as compared to paying tax on future distributions once the account recovers.
As you run through the calculations and consider this option, it is important to also keep in mind that deciding to delay the conversion to a Roth IRA until 2010 gives you the option of paying the tax due over two years. Additionally, conversions will be available next year regardless of your adjusted gross income.
If you are like many Americans who may be involved in work-related transitions, it is important to consider the impact that switching to a new employer may have on your retirement plan contributions. Your annual 401(k) contributions are limited to a total of $16,500 ($22,000 if you are over age 50), that figure includes contributions you make to all your employers’ plans. Be certain to calculate and adjust retirement plan contributions when you change jobs, as excess amounts could lead to unexpected additional taxes and penalties.
If you are making a leap to self-employment status this summer, don’t forget to continue funding for your retirement. There are many retirement plan options available for small business owners and consultants that are very easy to implement.
---Carolyn L. Mora, CPA, CFP®
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Carolyn L. Mora is a Certified Public Accountant and Certified Financial Planner in El Paso, Texas where her work is focused on serving the tax and financial planning needs of physician practices, business entities and individuals. Ms. Mora has appeared as a speaker on tax matters and estate planning issues on several occasions, including serving as a speaker at the Women in Business Conferences conducted in El Paso and the Estate Planning Conference for Women hosted by the University of Texas at El Paso. She has also addressed the El Paso County Medical Society on the topic of tax planning for physicians. She is the author of a bi-weekly column appearing in the El Paso Times Personal Finance Section.