(888) 277-4253

Big Assets: Five important year-end tax tips you don’t want to miss

It is difficult to believe that Halloween and Thanksgiving have passed. I’ve been holding out for a late San Diego summer that didn’t even have the courtesy to call to say he isn’t going to make it this year.

Congress and the White House still haven’t figured out what to do about next year’s income tax rates or estate tax (not to mention repealing DADT). All these unknowns make it difficult to do tax planning. However, I’ve come up with five tax tips that apply regardless of the productivity levels from our elected officials.

No. 1: Couples do the splits

Registered Domestic Partners (RDP’s) in California should combine and then equally split their incomes for their individual 2010 federal tax returns. This is new for 2010 based on an IRS “private letter ruling” made this summer for a California couple.

Suppose one partner earns $150,000 and the other earns $50,000. This couple would add their incomes and equally split the total with each partner reporting $100,000 of income.

In this example, the new ruling creates a tax savings for RDP’s. The higher-earning partner would be in the 28% tax bracket and the other partner would be in the 25% tax bracket. By combining and equally splitting their incomes, the higher-earning partner shifts a portion of income to the partner’s lower 25% tax bracket.

It’s important to note that this only applies to California RDP’s due to state community property laws. How this impacts the 18,000 California couples that are legally married is not clear.

You can read more about this topic in Christopher Heritage’s article. RDP’s and married couples should consult a CPA to review their situation. Find several CPA’s that serve our community at SDGLN’s Equality Directory and GSDBA’s Directory.

No. 2: Dump that loser

OK, so that great investment tip your day-trading buddy gave you didn’t pan out. It did not double your money as promised and the darn thing is down several thousand dollars. It’s time to finally dump it and move on. Anyone with investment losses can use them to first offset any capital gains. Any remaining loss can then be used to reduce taxable income by $3,000.

Still have investment losses remaining? No problem, you can carry these losses forward to future years until all the losses are used up.
This is my favorite and easiest to implement tax-saver. All you need to do is sell any stocks or mutual funds that are currently showing a loss on the most recent account statement. It’s called tax-loss harvesting.

Reducing your taxable income by $3,000 for someone in the 25% tax bracket equals $750 of tax savings. Not too shabby.

Remember this only works for investment losses in taxable accounts and is not applicable to investments held in your retirement accounts like a 401k, 403b, IRA, and Roth IRA. And don’t buy back that same investment within the next 30-days or the loss doesn’t count.

No. 3: Making work pay

Hopefully everyone that qualifies is taking advantage of this free money called the Making Work Pay tax credit. There is a $400 tax credit for 2009 and 2010 if you earned at least $6,450 during the year and have an adjusted gross income (AGI) of $75,000 or less. AGI is the last line on your tax return’s first page.

You can receive a partial credit if you earned less than $6,450 or have an AGI between $75,000 and $95,000. However, I am not going to bore you with all the details. Google it if either of these situations apply to you.

No. 4: Be a giver

There have been many budget cuts at the federal and state level that have decreased and/or eliminated funding for crucial non-profit organizations. This is a very important year to make charitable donations.

Not only does it feel great to donate, it can also be a tax savings if you itemize deductions. This is usually the case for folks that own their home. Less likely if you rent. Also know that you have to file IRS Form 8283 for tax deductions that have total noncash contributions over $500.

No. 5: Estate docs

OK, this isn’t a year-end tax tip. But it is so important that you should do this by year-end. Go get your estate planning documents! The common myth is only well-to-do folks need them. Think again, my friends.

Everyone should have the following three documents:

Will: This document is a set of written instructions stating who should get your property upon your death, funeral instructions, and naming an executor. Granted, it can be difficult for many people to even think about such a situation. That is probably why so many do not have a will. However, it is extremely important. If you don’t do this, the State has a will for you. It’s not one you want, so create your own.

Advanced Healthcare Directive (AHCD): This document identifies who can make medical decisions for you when you are unable to do it yourself. Not to be gruesome, but any of us could end up in a bad car accident. Who is going to make those critical medical decisions for you? Just like the Will, the State is happy to provide the rules on who makes your medical decisions if you do not have an AHCD.

Power of Attorney for Finances: This is similar to the ACHD, except it is for finances. The power of attorney allows someone you trust to make financial decisions for you. If you’re in the hospital recovering for a few months, I doubt you’ll be too concerned about paying the bills. However, it is important to keep your financial life in order. Have someone ready to take over if when you are unable to do so.

I also highly recommend creating a living trust while you’re at it, but consult with your estate planning attorney to get advice on your specific circumstances. You can find estate planning attorneys who serve our community at SDGLN’s Equality Directory and GSDBA’s Directory.

Steve Doster, CFP®, is a Certified Financial Planner offering fee-only, hourly financial advice for do-it-yourself investors. www.dosterfinancialplanning.com