Year-end tax planning

Each year, I update this column on year- end tax planning. I actually follow the steps listed below and can testify that the planning works. It will probably take you a couple of hours to complete, but your time can be well worth the effort. Give it a try.

The general rule of deferring income and accelerating deductions at year-end is still good tax planning strategy. If you used a tax adviser in the past, you should meet with your adviser to assess your tax situation and discuss how the following tips may apply to your situation.



Tip #1. Determine where you are

Start by taking out last year’s tax returns, your most recent pay stubs and your investment account statements. Make a copy of your Form 1040 and pencil in estimates of your 2009 income. Use your investment account statements to estimate your interest and dividend income and also whether you have capital gains or losses. If you have a business, estimate your business income for 2009. If you have rental property, estimate your full year income and expenses.

Estimate your itemized deductions for 2009. These include: allowable medical expenses, all state and local taxes, allowable interest, charitable contributions, allowable losses and miscellaneous deductions. Pencil in your total deductions on your Form 1040 and subtract it from your adjusted gross income to determine your taxable income. Use the tax tables to determine your estimated tax. Subtract any applicable credits from your total tax. Using your pay stubs, estimate your withholding for the year and add quarterly tax payments. Subtract your payments from the total tax to determine the amount of your overpayment or tax due.

Tip #2. Accelerate deductions

Allowable deductions reduce your taxable income and your tax bill. The following is a sample list of actions that you can take before year-end to help reduce your tax burden:

•Pay state and local estimated income taxes before the end of the year.

•Pay property taxes before year-end.

•Pay your January, 2010 mortgage payment in December. The interest will be deductible this year.

•Be charitable. Make contributions to your favorite charities. Additionally, non-cash contributions such as clothing, household goods and appreciated securities can be deducted at their fair market value.

Tip #3. Harvest your losses

Analyze your investment portfolio with the objective of balancing out capital gains and losses. If you have stocks that have “paper” losses, try to sell enough losers to offset your realized capital gains for the year. Additionally, you can deduct an additional $3,000 ($1,500 for married filing separately) of losses from your regular income. Two words of caution: Be careful to avoid a “wash sale” that is re-buying the same security within 30 days before or after you sold shares. Additionally, losers that you dump have to be securities that you are comfortable selling at this time.

Tip #4. Defer income

The basic intent of deferring income is to lower your taxable income for the current year. This is limited for most wage earners, however there may be some opportunities. Deferring a year-end bonus to January 2010 will escape taxation in 2009. Investment property, such as real estate, which is being sold near the end of the year, could have the closing delayed until early 2010.

Tip #5. Get ready for 2010

First, set up a tax filing system for all of you tax-related receipts and statements. Keep a copy of your tax returns forever. If you anticipate receiving a large refund because of over withholding, consider filing a new W-4 to reduce your payroll withholding. Plan ahead for your 2010 IRA, 401K, and similar retirement account contributions. If you have a medical or child-care flexible spending account, make sure you use the full balance this year and plan ahead for next year.

Watch out for the AMT

You might be subject to the alternative minimum tax, (AMT) if your income is above $75,000, had significant write-offs, exercised incentive stock options or had significant capital gains. When it applies, the AMT is an “add-on” tax that is over and above your “regular” tax. To determine your AMT exposure, get the most recent version of Form 6251 and make the calculations.

The information provided here is a basic guideline to get you started. It is recommended that you consult a qualified tax professional to assess your personal situation.

(Michael G. Shinn, CFP, registered representative and advisory associate of and securities offered through Financial Network Investment Corp., member SIPC. Visit for more information or to send your comments or questions to Neither Michael Shinn nor Financial Network provides tax advice. Consult a tax professional before implementing any strategy.)


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