Year-end planning: Time for a reckoning

The economic downturn and new taxes planned by President-elect Barack Obama will make year-end planning a little more difficult and uncertain.

The new year is just around the corner, and now’s the time that tax advisors usually recommend shuffling your finances, said Eileen A.J. Connelly in the Associated Press. Besides scoring last-minute tax breaks, year-end planning is a chance to look to the future. “But with an economic downturn in full swing and a new president waiting in the wings, that typical advice is coming up against a range of uncertainties this year.” President-elect Barack Obama, for instance, has pledged to increase the capital gains rate and income taxes for higher-income households. If he follows through, many common year-end tax moves—such as deferring income or accelerating deductions—may not make sense for everyone. It’s never easy to predict the future. But this year, “a lot more thought” needs to go into year-end planning.

First consider whether you’ll make more or less money next year, said Bill Bischoff in SmartMoney. “Given the rising number of layoffs and employer cutbacks, that’s the $64,000 question for many folks.” Look at the different scenarios and make a calculated guess. If you expect to earn less next year, as many people do, you may want to prepay deductible expenses, such as your mortgage or your kid’s college tuition. You may also want to sell securities that have lost value, which will allow you to deduct up to $3,000 against ordinary income, and offset gains this year and beyond. No matter what, “I don’t think you should hesitate to unload shares you want to get rid of.”

Now may also be an ideal time to convert your traditional IRA to a Roth IRA, said Kimberly Lankford in You’ll pay taxes immediately on the amount you convert—but you won’t pay taxes on it when, at some point in the future, you start to draw it down. And future tax rates are almost certain to be higher than they are now. Right now portfolios are also—let’s hope—about as small as they’ll get, and “the lower your account value, the smaller your tax bill.” One caveat: If your adjusted gross income is more than $100,000 you’ll have to wait until 2010 to convert your IRA to a Roth.

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