Arbor Asset Allocation Model Portfolio (AAAMP) Blog

Year-end tax planning in 2009 is more important than ever due to looming major tax hikes coming as soon as next year.  First you should get a good idea of your tax bracket for 2009 and 2010.  Then it’s time to consider some maneuvering.  Here is some money saving ideas to consider right now:

Retirement Accounts

Maximize your pretax contributions to your 401k, 403(b) or IRA.  For an IRA you can contribute $5,000, or $6,000 if you are over age 50 or older. For a 401k or 403(b) the contribution limit is $16,500 , or 22,000 if you’re 50 or older.

Consider converting a traditional IRA to a Roth IRA – The $100,000 gross income limit on conversions will be lifted next year. But if your income is less than $100,000 you may want to consider doing a partial conversion if your tax bracket is going to be higher in 2010.

Taxable Accounts

Consider taking short-term gains – Normally you want to hold securities for 1 year or longer to get the lower capital gains rate. Profits on securities held for one year or less are taxed as ordinary income, where rates are now up to 35%. Net capital losses can offset short-term as well as long-term gains. If you have net short and or long term losses from 2009 or prior years, you might be able to match them with short-term gains and avoid paying tax.

Consider taking long-term gains – If you have long-term gains on assets you need to sell soon the current 15% capital gains rate might be higher next year.  If you don’t want to part with an asset, you can sell it anyway and immediately repurchase it. The “wash sale” rule, which prevents deducting a loss if you quickly repurchase the same security, only applies to losses, not to gains. Any future gain or loss would be based on the new purchase price.

Consider taking losses – Losses will offset profits dollar for dollar. Up to $3,000 of net losses can be deducted from your 2009 ordinary income.  Excess losses are carried into 2010. Don’t sell just for the tax break, but this could be a good opportunity to sell a stock whose prospects have changed since you purchased the stock.

Purchasing Items

If you’re going to buy a new car taxpayers can deduct the state and local sales and excise taxes on new cars, light trucks, motor homes, and motorcycles purchased by December 31, 2009.  Taxes paid on the first $49,500 of the cost qualify. There is no limit to how many vehicles you can buy.

Business owners with self-employment income can purchase up to $250,000 worth of business equipment and take a full tax deduction in 2009. To qualify, the equipment must be in service by year-end.

I hope you have found these tips useful. Of course you should always check with your accountant before making any decisions.  If I can help you with any of your investment management needs please feel free to contact me at KFinvest@aaamp.net or call me at 281-719-8904.