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2009 Year End Planning Strategies


With the fall season well underway and the end of the year fast approaching, it is a good time for investors to take a comprehensive review of their wealth and examine strategies to maximize it in 2010.

With the fall season well underway and the end of the year fast approaching, it is a good time for investors to take a comprehensive review of their wealth. This includes looking at your retirement investments, your insurance coverage, your job benefits and, most importantly, your tax management strategy.

We began doing this in my last blog when we discussed the 2010 Roth Conversion opportunity, in which the government is permitting all taxpayers, regardless of income, to convert their traditional IRAs to tax-free Roth IRAs. Now, let’s take a look at what else you can do now to maximize your wealth in 2010.

Estimate Tax Projections

Perhaps you switched jobs this year or experienced a change in your number of deductions? Perhaps the amount of your investment income is different this year compared to 2008? Make sure you accurately estimate your tax projections in order to avoid an unpleasant surprise at tax time next spring. Check with your tax professional about your overall tax liability and any estimated payments you may need to make.

Confirm Tax-loss Carry Forward

Check to see if you have investment losses from 2008 that you carried forward on your tax return. Any losses that were not used to offset gains can be carried forward on your federal return to offset future gains. With the recent run up in the markets it would be a good time to evaluate possible gains and offset them with losses you carried forward from 2008 or locked in this year. Remember, you can apply $3,000 of loss carry-forward against your ordinary income.

Employ Tax Loss Harvesting

If you have asset classes that are not performing as anticipated, you might want to harvest the tax losses for the current calendar year and reallocate your holdings in 2010.

Develop Asset Location Strategy

Take a good look at your "asset location," or which assets to hold in your taxable accounts versus tax-sheltered ones such as IRAs. Because capital gains rates are relatively low now, you may want to hold appreciating assets, such as stocks, in taxable accounts. Income-generating assets, such as bonds, may be better held inside your IRA.

If your portfolio includes assets in a company retirement plan, such as a 401(k), use your IRA to invest in the asset classes your company’s plan doesn’t offer.

Evaluate Stock Options

Although uncommon for doctors, stock options are not unheard of. Now is an excellent time to evaluate stock options you may have. If your company’s stock has risen recently, you may want to exercise those options now. If you have exercised stock options, but have not sold stock, you should consider waiting the required time-period, (typically two years from grant, one year from exercise) before selling. This delay in selling may enable you to pay the more favorable capital gains rate instead of the higher income tax rate, or have the transaction treated as income. Also, keep in mind that a significant sale of stock options may result in the alternate minimum tax.

Prepay Deductible Expenses

If there are no prepayment penalty clauses in your mortgage contract you may choose to prepay January’s mortgage payment in December to increase your itemized deductions in the current tax year. You can do the same with property taxes. You should remember that you will only have 11 months of deductions for next year, unless you choose to prepay January’s mortgage and property taxes early again. Also, if your adjusted gross income is over $166,000, itemized deductions begin to be phased out.

Consider Annual Gifting

Take advantage of the annual gifting rule, which allows you to gift assets free of federal tax. You can gift up to $13,000 per person per year. This is a useful tool to fund 529 college education plans for children or grandchildren. There is an option for an individual to gift $60,000 or a couple to gift $120,000 to front-load a 529-college plan. If you choose to front load a plan, you will not be able to make another tax-free gift to that 529-plan beneficiary for the next five years.

Review Job Benefit Changes

Examine if re-electing or changing your benefits at work will have tax consequences. Determine the appropriate amount to allocate to flexible spending accounts, review health and life insurance coverages, and verify that you are maximizing tax-deferred savings. Check with your human resources department to verify the deadline for making adjustments to your benefit programs.

Review Insurance Limits

With winter coming, now is the time to review property and casualty insurance limits. If you made improvements to your home or commercial property, you may need to increase coverage amounts.

Make Charitable Donations

Make charitable donations by December 31st to help offset the current year’s tax bill.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice