As 2010 winds down, there are several tax changes people should be aware of for their year-end financial planning.
While members of the U.S. Congress still are debating whether to renew tax cuts enacted during President George W. Bush’s tenure, there are some certainties in the picture, from the expiration of tax credits for energy efficient purchases to a change in the conversion of certain 401(k) retirement plans.
“I think people are trying to focus on the bigger-picture planning,” said Jeff Fehrman, president and owner of Fehrman Investment Group, an independent financial advisory firm in Augusta. “They’re trying to stick to things that you can review. … It’s tough when you don’t know what your future (tax) rate is going to be.”
Here are some tax measures to consider as the year comes to a close.
Expiring energy tax credits: Homeowners can recoup some of the costs of installing energy efficient upgrades such as windows and appliances. Improvements can run the gamut from a water heater to a programmable thermostat – basically anything that makes a home more energy efficient. The tax credits, which can reward a refund up to $1,500, will expire Dec. 31 and were part of the American Reinvestment and Recovery Act.
401(k) conversion changes: Starting in 2010, more people are eligible to convert their traditional IRAs to a Roth IRA. The income taxes owed because of the conversion can be paid over a two-year period. The change came into effect because of a new law signed by President Bush in 2006. Unlike a traditional IRA, a Roth IRA allows people to withdraw from their account on an after-tax basis.
Return of minimum distribution: In 2009, Uncle Sam waived the requirement that people more than 70 ½ years old take a minimum distribution from their retirement accounts. The required percentage is based on age, and increases as a person gets older. For example, a 70 year old with $100,000 in a retirement account would have to withdraw $3,700, while an 80-year-old with the same amount would have to withdraw $5,400, Fehrman said. The required minimum distribution was waived in 2009 to help retirement accounts recover from the plunge in the stock market.
Some general tips: If you think you are going to owe income taxes for 2010, you can increase the amount of federal income taxes withheld from your paycheck through the end of the year, according to analysts at Thomson Reuters Tax & Accounting service. The service also recommends contributing as much as possible to your 401(k) plan, especially if an employer matches your contribution, because the money is taken out of your paycheck before taxes.