Catch Up on Some Tax Planning
Summer is a good time to improve tax fitness with a few simple exercises.
Consider Roth IRA assets. By keeping assets inside a Roth IRA, they can grow tax free for retirement. Also, this year people can convert traditional IRAs to Roth IRAs. Account holders are no longer subject to the $100,000 modified adjusted gross income limit. With conversions that occur in 2010, they can also split their conversion amounts equally and report them as income for tax years 2011 and 2012.
Take advantage of tax-deferred retirement accounts. If you have a 401(k) or other employer-sponsored retirement plan available, contribute as much as you can afford to contribute. By increasing contributions every time you get a raise, you can increase your savings. The plans are basically funded with pretax dollars, which will reduce taxable income. Also, that money will grow tax free until it is withdrawn. If the contribution is to a Roth IRA, it is made with post-tax money, so the funds can be withdrawn tax free after the age of 59½.
Consider a 529 college savings plan. The annual $13,000 gift would go a long way toward the amount needed to save for education expenses. Contributors may also be eligible for a state tax deduction or credit. They can also take advantage of a special five-year accelerated gifting provision, which is $65,000 in one year per contributor. That covers the current year and the next four years.
Hold assets more than a year. Any capital gain made within a year is considered taxable income, like a salary. But gains taken after a year are considered capital gains, which in 2010 is taxed at the maximum rate of 15 percent. The capital gains rate is almost always lower than the income tax rate. Also, the capital gains rate is expected to go up to 20 percent next year, so some people are taking advantage by taking their gains this year.
Give to charity. Contributing to charities is always a good idea. But if you are planning a gift, it might be best to do it soon, because some in Washington have been looking at cutting back on charitable deductions as a revenue-saving measure.