Tax and Financial News for December 2001

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Not Another Christmas List? Yep.
Congratulations, you’re almost to the end of the year!!! Note we said almost and what a good thing the year isn’t over yet, because you may have a few things yet to do before year-end. In this article we’ll be presenting you with our checklist of the top ten things to get done before the end of the year. But since you’re probably as busy as we are, our top ten list is really a top eight list.

Have you paid all your bills? Wait, we’re not asking about the bills for Christmas presents. According to the American Way segment of your Life 101 class, those are supposed to take you until this time next year to pay. We’re talking about the deductible bills. Business expenses, itemized deductions, and similar expenses are the kinds of bills you need to pay before December 31st.

Remember, some itemized deductions are limited. You have to have medical expenses greater than 7.5% of Adjusted Gross Income (AGI) before you can begin deducting. If you do have unreimbursed expenses over that amount, you may want to look at paying them by using credit cards if you don’t have the cash. But be sure you can pay them off in a month or so or you could lose your tax benefits to the finance charges.

DO NOT, take money out of a retirement account to pay these bills. The deduction you gain is not worth the tax price you pay, especially if you’re under age 591/2. You could jeopardize your future ability to retire comfortably if you’re not careful.

Similarly, if you’re an employee and can claim employee business expenses, remember that expenses equal to the first 2% of your AGI are not deductible. If it appears that you won’t be able to claim enough expenses to exceed this amount substantially, pay the bills only when due.

Have you sold all the stock you need to sell? If you have big gains on stocks that you have sold, see if there are any loss stocks you can sell to offset those gains. What, you say there’s no way you had any gains this year with the market the way it has been? You may be right on your stocks, but what about mutual funds? Many likely didn’t throw off any capital gains, but be careful. If you happen to have a fund that does issue a capital gain distribution, you could be caught paying taxes. Pay close attention this month to your mutual funds to be certain you aren’t caught with phantom income.

Are you sure you want to sell that property now? Don’t forget that you have only one month left to this year. If you have assets for sale and a buyer, ask the buyer if they really need to close on the sale this year. Sometimes the answer is “yes”. Sometimes the answer is “no” and that can save you a great deal in taxes this year if you have big gains. Putting the sale off by one day or one month will keep you from paying taxes for up to fifteen months. You could be earning interest for a whole year on that money.

A second option you may have is to sell the property on an installment basis and receive only enough cash to pay for any taxes that may be due for the current year. Sale of certain depreciated property will trigger income tax regardless of how much of the purchase price you receive in the current year.

Do you feel like spreading the wealth? This may not be a popular thought, but you can’t bank on the estate tax really going away in the future. This means you should still be looking for ways to reduce your estate if it’s potentially taxable. A very good way to do that is to establish an annual gifting program or continue doing so if you already have a program in place.

Remember, the first $10,000 you give to a donee is not reportable on a gift tax return ($20,000 if you and your spouse split gifts). The gift must be free of any strings and the recipient must gain immediate control of the gift.

This can be tricky if you’ve set up a trust for your children or grandchildren to receive the annual gifts. If you decide do this, make sure you issue what are called “Crummey Letters.” Crummey Letters notify a beneficiary that money has been put into a trust for them and they can pull the money out if they wish. If the heir does not wish to withdraw the money, then they send a letter back to the trustee saying they don’t want the money and the money becomes part of the principal of the trust. The heir will then not have access to the funds, except in accordance with the trust document. Hence, you give the money away, but keep your ten-year-old from buying up the local supply of skateboards or Pokemon cards.

You may be concerned the beneficiary will elect to withdraw the funds instead of leaving them in the trust. Generally, if it’s explained in a nice way that they if they take the money now for ice cream sodas and CD’s, they shouldn’t expect to get anything later on, they may change their mind about withdrawing the funds.

Do you plan making contributions to an Education IRA? If so, make sure you do it before December 31. The new tax law has increased the $500 limit on Education IRAs and allows contributions to be made through April 15 following the tax year, but that doesn’t kick in until next year. For 2001, you’re still limited to $500 per beneficiary and the contribution must be made by December 31. Remember the income limits for contributions: Married filing jointly can’t make the contribution if their AGI exceeds $160,000 and single filers can’t make the contribution if their income exceeds $110,000.

Do you want to convert your IRA to a Roth IRA? If you want to convert an IRA from a traditional IRA to a Roth, the sooner the better to start the 5 year holding period countdown. If so, do it before December 31. A rollover by December 31 for the 2001 tax year will start the clock ticking as of January 1, 2001. This means you’ll be able to avail yourself of the 5-year holding period rule on January 1, 2006. If you wait to rollover the traditional IRA until January 1, 2002, you’ll not be able to withdraw tax-free, assuming you meet all the requirements. You’ll have to wait a full year.

Have we talked yet? Your seventh “must do” item before December 31 is to give us a call so we can discuss what other options you may have to reduce this year’s taxes or take maximum advantage of the tax laws for this and future years. Please remember, though, the sooner we talk, the more time you’ll have to implement any planning suggestions, so call us soon!

The eighth and final thing you must do before December 31 is:

Have a wonderful holiday season!


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