As we approach year-end it’s time to take stock to see if there are opportunities to reduce taxes or improve your long-term position. With the uncertainty surrounding tax rates in the coming years, it is important to plan for the most likely situation, so that the worst-case-scenario will have the least impact, and you can take advantage of the current opportunities that may be present. Here are some ideas to consider now while you are reviewing your finances:

  1. Convert all or a portion of your regular IRAs to Roth IRAs. You will pay taxes upfront on any amount converted; however, going forward your distributions will be tax-free with no minimum distribution requirements. 2010 is the first year this option is available to individuals with incomes over $100,000, and is also the only year you can defer the taxes to the following two years if you choose. There is much to consider, and it is not a good idea for everyone. Ask your financial advisor if this is an appropriate solution for you.
  2. Re-finance your mortgage to a lower rate. Mortgage rates are at historic lows, so it is a perfect time to review your options. If you have a home equity line of credit, you may want to roll this amount into the mortgage as well to lock into the low rates, unless you think you will be able to pay it off in the next few years. Also, if your cash flow will allow it, you may want to look at a 15-year loan instead of a 30-year to get the interest rates even lower.
  3. Sell appreciated assets to capture the capital gains in 2010. It may seem counter-intuitive to pay taxes sooner than needed, but the capital gain tax rate is set to increase next year from 15% to 20% and many of the proposals floating out there increase it even more. If you still want to hold the security, you can re-purchase it the next day. You just want to trigger the sale and bring your cost basis up to the current value.
  4. Check your mutual funds’ expected capital gain distribution. If your unrealized gain is less than the expected distribution, it might make sense to sell the fund before the distribution date. If you sell at a loss, be sure to stay out of the fund for at least 30 days to avoid the wash sale rules.
  5. Gift appreciated assets instead of cash. Another option for your appreciated stock is to use them for your charitable donations instead of cash. If you give stock, transferring them “in kind,” the charity receives them with your tax basis. However, since charities don’t pay taxes, it is as valuable as cash to them. You get to deduct the full market value of the gift, and you never need to pay the tax on the gain.
  6. Review your corporate benefits. Adjust your medical spending accounts and retirement plan contributions to make sure you are taking full advantage of them. Review your disability premiums to make sure you are paying them with after-tax dollars. The extra tax you will pay is negligible, but if you need to make a claim all benefits will be received tax-free.
  7. Contribute to your kids’ education plans. 529 plan contributions must be made before December 31st to be deductible on your Michigan tax return. Up to $10,000 can be deducted if you contribute to the Michigan Education Savings Plan (MESP) before the end of the year ($5,000 for single filers).
  8. If you are self-employed, consider establishing either a single-member 401(k) or a SEP IRA. This will increase the amount you can put aside for retirement over a regular IRA, from $6,000 per year to potentially $49,000. Whether a single-member 401(k) or a SEP IRA is better, depends on how much you make, whether you have employees, your age, and your priorities for setting up the retirement plan.

The end of the year is always a good time for a financial review, but 2010 brings some unique opportunities and challenges warranting extra planning before you miss the chance to take advantage of them. If any of the items above applies to you, consider hiring a professional financial planner to review your situation. The amount you pay to a professional can save you much more than you spend. The question to ask is not, “can I afford to hire a professional?” but “can I afford NOT to hire a professional?”

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