End of year tax planning for wage slaves....

[maddythebeagle]

So want to hear what folks are doing esp. Justin since it sounds like he ends up paying little in taxes

here's what I have done/plan so far:

- already max to 401k type account.
- updated FSA (had to sign up in nov. for 2007 contributions).....Ended up putting more in than usual since expect more medical spending in 2007.
- will be prepaying 2007 state and property taxes again in Dec., 2006.
- have in the past prepaid Jan. 2007 mortgage payment so that can end up paying 13 months of mortgage interest in 1 year. This is somewhat of a hassle since the bank gets confused...

---also need to update my 401k contribution every so slightly to get the 15,500 for 2007.

The 2% misc. deduction thing is always a hard one for me....we get reinbursed less than the federal rate for mileage, so I believe that difference can be used there....

 

[flipstress]

Similar to you:
- maxed out deferred comp contributions
- maxed out ROTH contributions
- trying to spend all funds in health flexible spending account

In addition:
- bundling up charity donations of clothing and other items for inclusion in 2006 tax return

Thanks for the reminder to:
- increase deferred comp contributions to $15,500 for 2007 (Although HR admin said our 2007 max is still just $15K, I'll ask her again if it's not really $15.5K.)

 

[MooreBonds]

So want to hear what folks are doing esp. Justin since it sounds like he ends up paying little in taxes

For the most part, already maxed out contributions for 2006 in Jan 2006...so planning for Jan 2007 moves:

2006 Tax Year
--Max out non-deductible Traditional IRA contribution ($4,000)
--Set up Charitable Endowment Program with either Vanguard/T Rowe Price/Fidelity ($25,000)


2007 Tax Year (January)
--Max out HSA account contribution for 2007 ($2,850 for my $5,100 deductible policy)
--Max out non-deductible Traditional IRA contribution ($4,000)
--Max out 401(k) voluntary contribution in Jan/Feb/Mar/Apr ($15,500)

Later on in 2007:
--Make follow-up contribution to Charitable Endowment Program ($10,000)

Might be finally buying a house, so might have some real estate tax deduction moves in late 2007 (like paying 2008 property taxes).

Attention flipstress: new legislation allows potential transfer of balances from Flexible Spending Account to a Health Savings Account! See
http://www.shrm.org/hrnews_published/CMS_019574.asp

 

[Nords]

Here's what I've done:
- Roth IRA conversion (Fidelity will now do it over the phone-- much easier!)
- Consider cap gains tax-loss selling (no need)

Here's what's left before the end of the year:
- Update the dividend/cap gains/rentals/mileage spreadsheet
- Check the mortgage-interest statements
- Download a copy of TurboTax before the big rush
- Tinker with estimated taxes now, not on 14 April
- Look up the rules on solar-power tax credits, although our next purchase probably won't be until 2007
- Empty the Goodwill closet
- Help the kid choose her Roth IRA

We didn't do any specific-share sales this year, so hopefully we'll fill out Schedule D without any continuation pages!

Boy, we're living life in the fast lane...

 

[MikeK]

Great reminder to up my 401K contribution. I'll set a reminder for after the New Year.

Don't prepay property taxes if you hit the AMT limits. Make sure you can really deduct the extra interest. Three or four years ago I was proud of myself for prepaying my property taxes on 12/30. Lo and behold, the deduction got removed in the AMT calculation. I gave the CA state government my money early and got no tax benefits.

Can't we make a tax system that I can understand? It's difficult to make these pre-payment decisions unless you have tax software to calculate the impact.

Mike

 

[kaneohe]

2007 Tax Year (January)
----Max out 401(k) voluntary contribution in Jan/Feb/Mar/Apr ($15,500)

MB,

I might be misreading your post but it sounds like you are trying to contribute the annual max of $15.5K in 4 mos? Does your company match your contributions? Many (most?) companies will match each paycheck up to a max. For these companies, if you only contribute for 4 mos in the year ,you will lose out on 2/3 of the annual match max. since you are only contributing for 1/3 of the year. You may want to check w/ your HR dept to see how your plan operates and see if you want to sacrifice the rest of the match in exchange for an accelerated contribution into the tax deferred environment.

Ex: You earn $120K/yr = $10K/mo and contribute 12.5% =$1250/mo.
for 12 mo.
Your co. matches up to a max of 6%/paycheck = $600/mo for a
total match of $7200/yr.

Ex: You contribute 37.5%=$3750/mo. for the first 4 mos. Your co. matches
up to a max of 6%/paycheck= $600/mo for a total match of $2400
per yr. (I assumed the max annual contribution was $15K to simplify
the math)

 

[LOL!]

This might be the first year we are gonna be in AMT land. So I've been finagling deductions and income to see if I can avoid it.

1. I got my employer to pay a bonus check in January 2007 instead of December 2006. The entire bonus will go into my 401(k) as my "catchup" contribution.
2. We are paying part of our property taxes in Dec and part in Jan. The tax assessor actually allows this. This helps fine tune our deductions to get to the edge not paying AMT.
3. Do some TurboTax scenarios to try to make sense of all this.

 

[Gumby]

Done so far:

1. Maxed out 401k, 403b, 457 for 2006
2. Increased paycheck deductions to account for higher limits in 2007
3. Purchased Tax Cut and made a preliminary run
4. Determined that there are no W-4 adjustments needed for next year.
5. Maxed out non-deductible IRA contributions for 2006 (we will convert to Roth after retirement)

To do:

1. Write the last few checks to get to our target number for charitable contributions.

***

We paid AMT for the last 3 years, will pay it for 2006 and probably will again next year. For that reason, shifting income and deductions is pointless for us.

 

[MooreBonds]

2007 Tax Year (January)
----Max out 401(k) voluntary contribution in Jan/Feb/Mar/Apr ($15,500)

MB,

I might be misreading your post but it sounds like you are trying to contribute the annual max of $15.5K in 4 mos?

No, nothing misunderstood. Message received and understood.

Does your company match your contributions?

No. It's a 401(k) combined with a Defined Benefit Plan (traditional pension). The 401(k) is entirely voluntary, and is 100% employee contribution. So, I can contribute whenever.

But thanks for the example.

 

[Outtahere]

I have all my tax records together, 401k is funded to the max plus the catch up portion. My only problem is waiting for the 401k census to see if I'll be getting money back on that since I'm considered a "highly compensated" employee. Income level excludes me from opening an IRA or a Roth, I don't think I'll hit AMT yet but with my luck who know.

 

[TargaDave]

Biggest change for us:
Self employed DW switching from SEP-IRA to Individual 401K. Higher deferral limit.

 

[justin]

I'm sorry to report that I haven't done a lot of tax planning out of the ordinary this year.

Funded 401k to max for me and DW
Funded two traditional IRA's to max
Successfully tax-planned investments into correct taxable/tax deferred accounts

That's pretty much it for this year. I don't itemize because the standard is higher (this may change next year).

I decided not to do any tax loss selling for the $3000 capital loss against ordinary income since I'd have to take a bunch of losses first to offset the capital gains distributions a few funds paid out (~$5000 or so ). In future years when CG distributions are minimal I may do some tax loss selling. Right now I'm still in the 15% bracket on ordinary income and 5% bracket on long term CG's. I don't mind paying the 5% tax on the CG's now. I may have to revisit this question after all the CG distributions are in next week (and on one of my days off from work).

I had another kid this year, which means a big deduction and a big credit. To offset that, DW got a job and as a result I will probably end up paying a few thousand in income taxes.

I did manage to use around $5000 in a FSA this year (child birth, I got $3500 LASIK, misc. medical expenses, etc).

Next year we are contributing $2400 pretax to a HSA from DW's job. Still haven't figured out if we should spend this money on med expenses or save it and let it grow.

Changed 2007 401k withholding percentage to reflect increase in 401k contribution limits.

In my time off over christmas, I may look closer at itemized deductions for 2007 to see if I can scrounge up enough deductions to make it worth while.

This will be our first year ever in our adult lives that we don't have any education expense deductions/credits.

We do have massive student loan debt and the above-the-line deduction of interest on these loans! (30 year locked at 2.75%, to decrease to 0.75% over the next 3 years!)

 

[OAG]

If you can pay your RE taxes early; in 2006 versus into 2007. If you are close to being able to itemize your deductions this can do it. It may work on an every other year basis for those that do not have the mortgage interes expense. In the "other" years you just take the standard deduction.

Likewise if the above will work and you pay your own dental costs you can get dental work done now or at least scheduled now (and prepaid) you may find that the medical deduction can come into play. Remember to include in the medical all the prescriptions you paid for and the milage for the trips back and forth to the doctor's office.

Energy deductions (above the line) can be taken. Thinking of adding insulation yourself? Buy it now and store it until you have the time to install it. Other qualifying (energy star) appliances can be purchased now and delivered and installed after the first of the year.

Also for 2007 think about this one, it is new, President signed law yesterday "The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately)."

 

[justin]

I just bumped into our HR person. 2007 FSA enrollment is coming up soon. HR doesn't know anything about the FSA to HSA conversion that apparently just got passed into law. I'm thinking of making the $2000 max FSA contribution IF I know I can pull it out and put it into an HSA. Anyone have any more info on this?

 

[retire@40]

Likewise if the above will work and you pay your own dental costs you can get dental work done now or at least scheduled now (and prepaid) you may find that the medical deduction can come into play.

How is prepaid medical deductible? With a rare exception, I never heard of prepaid medical being deductible.

 

[WanderALot]

I decided not to do any tax loss selling for the $3000 capital loss against ordinary income since I'd have to take a bunch of losses first to offset the capital gains distributions a few funds paid out (~$5000 or so Sad ). In future years when CG distributions are minimal I may do some tax loss selling. Right now I'm still in the 15% bracket on ordinary income and 5% bracket on long term CG's. I don't mind paying the 5% tax on the CG's now.

I don't see the connection here, what am I missing? Does a capital loss have to be first taken against CG distributions before it can be applied against ordinary income? If so, what about long-term and short-term CG distributions? Man, if this is the case, I can't believe I didn't realize this! I've been pretty fortunate with not having too many capital losses, but I should have definitely noticed this.

 

[Martha]

I just bumped into our HR person. 2007 FSA enrollment is coming up soon. HR doesn't know anything about the FSA to HSA conversion that apparently just got passed into law. I'm thinking of making the $2000 max FSA contribution IF I know I can pull it out and put it into an HSA. Anyone have any more info on this?

I have very little info. I believe you will be allowed a one time tax free conversion. So, it could be that if you don't end up doing it this year, you might be able to do it next year. I have no idea if the employer has to have a policy or not.

 

[Martha]

Does a capital loss have to be first taken against CG distributions before it can be applied against ordinary income?

Yes.

 

[justin]

I don't see the connection here, what am I missing? Does a capital loss have to be first taken against CG distributions before it can be applied against ordinary income? If so, what about long-term and short-term CG distributions? Man, if this is the case, I can't believe I didn't realize this! I've been pretty fortunate with not having too many capital losses, but I should have definitely noticed this.

Like martha said, your capital losses offset all capital gains first before you get to use any of the $3000 capital losses as a deduction against ordinary income. I figure why waste capital losses (money in the bank!) avoiding a 5% tax on my capital gains distributions when I can save the capital losses for a "lean" year when I get zero or very small capital gains distributions and can use the capital losses to avoid a 15% or 25% tax. I've only got about $6500 in capital losses left to use (hanging on to the Lucents and nortels from 2000!).

 

[SecondCor521]

I haven't done very much tax planning, as I don't even know what my tax situation will be this year due to a divorce, a separation payment, working for three different employers, etc.

But I have done the following:

1. Maxed out Roth IRA.
2. Maxed out contribution to state 529 plan.
3. Maxed out contributions to two of my three kids' ESA's (third kid is already fully funded).
4. Signed up for newest employer's 401(k) plan at 5% (no employer matching).

And plan to:

1. Donate stuff to charity before the end of the year.

Also, every year I keep a little Word doc which has reminders to me about any miscellaneous things I need to remember to include. Right now there are probably about 50-75 items on the list.

2Cor521

 

[Outtahere]

I've maxed out the 401k but may get some money back from that as I'm considered a highly compensated employee. Finished up all my donations and the only thing left to do is gather all my information together and wait for account year end statements. I wish I could contribute to an IRA or a Roth but I'm above the limits

 

[LOL!]

I've only got about $6500 in capital losses left to use (hanging on to the Lucents and nortels from 2000!).

Don't forget that your losers haven't done anything to increase your net worth in the last few years. If you had booked your losses earlier, you could've used the proceeds to double your money in the last few years in other investments. My rule of thumb: Always book losses. That philosophy has saved my butt from worse disasters a number of times.

Loss aversion (and realization) is a big bugaboo in behavioral finance.

 

[justin]

Don't forget that your losers haven't done anything to increase your net worth in the last few years. If you had booked your losses earlier, you could've used the proceeds to double your money in the last few years in other investments. My rule of thumb: Always book losses. That philosophy has saved my butt from worse disasters a number of times.

The majority of my losses are from lucent and nortel - basically throw away stocks where I have lost 95% or so of my principal and only have a very small value left (~$270 total). To me it is obvious that booking my losses now and avoiding 5% taxation on $6500 instead of waiting a few years and avoiding 15-25% taxation on $6500 is a poor choice. Besides, my $270 position in lucent and nortel could always double before I sell it. It happened to another "loser" for which you would have recommended that I sell to book a loss. HPQ has tripled in value since its low point a few years ago. I've actually made a positive return on what I thought was a stinker. The losers don't identify themselves until after the fact.

I am glad you said something though because it reminded me that I need to (long-term) sell these small individual stock holdings (the winners and the losers!) since they don't really fit into my portfolio plan going forward. And they are ~1% of my portfolio so they have almost no impact on my total returns.