Fall Tax Planning To-Do List

It is true that it’s hard to do tax planning this year with all the open issues.  Still there are some things you can do now that will make it that much easier to react when we are able to fill in the blanks on the unknowns. 

 So here are 5 tax topics to make some decisions about while we wait for Congress to make their decisions on taxes.

 1.  Year end is always a good time to benchmark your retirement plan savings.  Either max out on your tax deductible retirement contributions for the year or convert some of your qualified plans to Roth IRAs.  As mentioned in earlier posts – this is a prime year to convert to a Roth plan if you are so inclined.  In 2010 only you can pay the tax liability on conversions over two years rather than right away.  No penalties.  And payments don’t start until 2011.  If you can afford it, and believe tax rates and / or your income are heading up, this is a must do.

2.  If you’re planning any activities that will lead to big deductions this year, make sure you need them.  If tax rates are higher next year you will appreciate the deduction even more.  Your favorite charity may prefer to get a holiday gift donation, but they’ll still happily take the money in January.  At that point the reward for giving may be larger for doing the same amount of good.

3.  There are still some energy saving tax credits to be gained this year if you’re feeling flush.  (Even if our bank balance isn’t large,  the combination of tax benefits and lower utility bills may make it worth deferring another kind of purchase until the new year.)  You can find the eligible energy tax credit purchases at www.energysavers.gov. 

- One warning here.  Many of our clients confuse the energy saving appliance rebate with this energy tax credit.  They are NOT the same thing.  The credit is for a new furnace or window, not a new washing machine.

4.  Some key education savings vehicles are on the list of tax breaks due to expire at the end of 2010.  It doesn’t hurt to use any education tax breaks to the max while they are there for sure.  For example, The American Opportunity Education Credit of to $2,500 is based on maximum spending of $4,000.  If you haven’t hit that threshold yet you are allowed to include pre-paid tuition for next semester in the year that it’s paid.  Also, if there are books you know you’ll need next semester they also qualify. 

Beware -- If you pay these expenses from a 529 Plan Account they are NOT eligible for the credit.

Speaking of 529 Plans, if you have one and also have money in a Coverdell Education Savings Account, you may want to roll the Coverdell Funds into the 529 plan.  Coverdell Accounts are due to be much less attractive without new legislation after 2010.  The 529 Plans are not on the chopping block.  The transfer from one account to the other is tax free.

5.    In January the reimbursable expenses for Flex Spending Accounts, Health Savings Accounts, Archer Medical and other tax-protected health reimbursement accounts will change.  In 2011 you won’t be able to use money in those accounts to purchase over the counter medications.  (Your doctor can write you a prescription for a drug you could purchase OTC and you can buy it that way.)  Have no idea why this has been changed, but if you’re in a “use it or lose it” plan add non-prescription medications to your holiday shopping list.