Year End Tax Activities

To minimize our tax liability, I usually review our tax situation in December. Since retiring, our year end tax strategies have been somewhat different than those in our working years.

For example, we plan to use the standard deduction for the first time on the 2010 federal tax return instead of our usual itemized deductions. As a result, we have shifted our regular itemized deductions to either the 2009 or 2011 tax year. In addition, we still are carrying large stock losses from 2008 and 2009 tax years. Therefore, for 2010, our year end tax planning will focus primarily on retirement and college savings accounts instead of on charitable contributions, property taxes, and stock sales.

Here are our key tax related activities for the 2010 tax year:

Roth conversions - We plan to continue converting some of our IRA funds to Roth IRAs. Depending on the amount, some or all of the tax for the conversion will be offset by the child, saver's and making work pay tax credits. The conversion needs to be initiated by December 31, 2010.

College saving account - We will make the maximum contribution that is deductible on our state tax return. The contribution is not deductible on the federal tax return. This contribution needs to be completed by December 31, 2010.

IRA contributions - Our current plan is to make the maximum contributions to traditional IRAs. The contributions will reduce our adjusted gross income and qualify us for the saver's credit. This contribution can be made until April 15, 2011 and still be used on our 2010 return.

Below certain conversion amounts, I estimate we can reduce our federal tax liability to zero and reduce our state tax liability to a few hundred dollars. Thus, it may be possible to get refunds of almost all taxes withheld or made as estimated payments for 2010. I will be working through the scenarios in the next week to finalize the amount for the Roth IRA conversions.

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This is not financial or tax advice. Please consult a professional advisor.

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