It always seems to be here before we’re ready: summer is coming to an end and soon the leaves will be begin to fall. Old Man Winter will be pulling out his coat, and we will be planning Thanksgiving dinner and holiday festivities. But before we get immersed in planning our celebrations, it’s time to think about year-end tax planning and opportunities.  In addition to your normal year-end tax planning, here are some other considerations you may want to discuss with your tax preparer and Family CFO prior to December 31.

• If you are 70½ or older, be aware that you are not required to take a required minimum distribution from your IRA in 2009. This may result in a significant tax savings.   If you do not have other significant income—such as a pension, deferred compensation or other—you may consider the merits of taking a partial distribution from your retirement account, primarily if doing so will result in minimal or no additional taxes due.  This may be particularly appropriate if you have experienced a reduction in income in 2009, have substantial tax deductions and/ or if you anticipate higher tax rates in 2010.
• If you have experienced a reduction in income in 2009, retired or not, you should consider opportunities to realize deferred income at lower tax rates.  An example may be Savings Bonds that have matured or are earning minimal interest that you have postponed cashing in to avoid current income taxation. 

• With regard to anticipated tax rate changes, there is much debate on Capitol Hill concerning the “Bush Era Tax Cuts” and their possible early repeal.  Regardless of the outcome of this heated debate, it appears certain that they will be allowed to expire on December 31, 2010.  These tax cuts included a reduction of individual income tax rates from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, 28, 33, and 35 percent, and a reduction in long-term capital gain tax rates from 20 percent for the highest earners to 15 percent.  In fact, those who are currently in the 10 and 15 percent income tax brackets will pay 0 percent on long-term capital gains realized in 2009.

If you are fortunate enough to have significant unrealized capital gains, you may consider realizing a portion of your gain at these reduced capital gain tax rates while they last.  As Congress and the President debate the future of income tax rates, there seems to be little doubt that capital gain tax rates will return to their “pre-Bush” rates—if not higher.

• Many of you are likely aware of the special ROTH IRA Conversion opportunity available to taxpayers in 2010.  One of the highlights of this planning opportunity is the ability to pay the taxes due on the Conversion during tax years 2011 and 2012.  While this presents an opportunity to break up your tax bill over three years by not recognizing any income in 2010 and then recognizing half in each of the following two years,  there is the risk that tax rates will be higher when the tax bill comes in 2011 and 2012. 

If you find yourself in a lower tax bracket this year, consider the wisdom of converting a portion of your IRA in 2009 to lock in your tax bill at historically low rates.  It is important to note however, that unlike tax years 2010 and beyond, your Adjusted Gross Income (AGI) may not exceed $100,000 in 2009 otherwise you will not be eligible to convert.

 We encourage you to consider these planning points within your own financial plan and to discuss these matters with your Family CFO and tax preparer. 

Billy D. Dickens III, CFP®

Bill is the professional consultant for Doug Weber.