It’s Not Too Late: Last Minute End of Year Tax Planning

by Lauren Lyons Cole on 28 December 2010 4 comments
Photo: onurdongel

If you’ve procrastinated end of your tax planning up to this point, it’s probably for good reason. December is a busy month for finances — between charity donations, gift buying, and holiday travel my own tolerance for thinking about money wears thin. But now that the holiday rush has been reduced to returning unwanted gifts and only a few days remain in 2010, it’s not too late to devote time to wrapping up your 2010 finances. Here are two important tax-planning moves you should consider over the next few days.

2010 Is the Year of the Roth Conversion

You’ve heard it said over and over this year, and maybe you’ve given it a little thought. If you’re still on the fence about doing a Roth IRA conversion — or if you’ve just been slow to act — the time has come to make a decision. In most cases the answer is “just do it,” but if you’re still not sure a few quick inputs in one of those conversion calculators will speak for itself.

Remember, it doesn’t have to be an all or nothing affair. You can convert half of your IRA balance to a Roth, or whatever number seems right based on your situation. Just make sure you have enough cash on hand to pay taxes on the amount you convert. If the process seems overwhelming, call your brokerage firm directly. Roth conversions are old news to customer service reps who have been helping people do these all year. Rely on their guidance to get it done in time to reap the benefits of converting in 2010.

Sell Some of Your Investments

Saying goodbye to a losing investment or rebalancing to get back to your ideal asset allocation can seem like a daunting task. If you need an extra push to make changes you’ve been putting off, give yourself a deadline of December 31st. Financial advisors and accountants will give you a laundry list of reasons why this is prudent on any given year, but 2010 is particularly ripe for selling investments.

Long-term capital gains rates have been extended through 2012, but it’s likely that your income will increase over the next few years. If you happen to qualify for the 0% tax rate (in 2010 that means making less than $34,000 if you’re single or $68,000 if you’re married filing jointly), it may be time to finally sell that portfolio of stocks you inherited from a grandparent a few years ago. Especially if you’ve used up your cash reserves and need to rebuild your emergency fund or pay off a credit card that you’ve been neglecting, this could be just the strategy you need.

Whether you’re on vacation this week or manning a quiet office while others are traveling, take some time to review your investments. You’ve got until Thursday to stop procrastinating and make those end-of-year tax-planning moves that you’ve been hearing about all month. Now, if you’ll excuse me, I’ve got to log into my online account...

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Matt

How late can we contribute to our Roth Ira account? I am not going to max out this year, but woul it be smart to get one more contribution in?

Lauren Lyons Cole's picture

Great question Matt! No rush on contributions--you can make those until April 15th (tax day) of the following year. So, Roth contributions for 2010 can be made until April 15, 2011. It's just the Roth conversion--converting a traditional IRA to a Roth IRA that has to happen by Dec 31 to count as a 2010 conversion. I hope that helps!

Guest's picture

This is good advice, which is similar to what my tax advisor suggested. Since I have been working to start a business, my income is way down that results in a lower tax rate and provides extra incentive to convert funds from my IRA to a Roth IRA. However, people do need to be careful - converting fund from an IRA to a Roth IRA does create a taxable event and if cash is important to your situation now, people may want to evaluate how much of IRA they want to convert to a Roth IRA in one year.

Guest's picture

Don't forget to pay your January mortgage payment in December, pay the second half of real estate taxes, and any other deductible expenses. If you can shift income to the following year if you think it will benefit you. Good luck