Spring is a season of rebirth and regeneration. Make the most of this season by thinking ahead. Why wait until the last minute to prepare for your year-end tax planning? It is never too early to begin assessing your goals for your year-end tax planning.  Here are some financial items on your to-do list that can easily get done this spring.

Consider maximizing your 401k contribution. For a variety of reasons, many clients are not on track to maximize their 401k contribution.  Your maximum contribution for 2011 remains at $16,500.  For those of you who are age 50 and older, the catch up contribution is $5,500.  Contributing to your 401k can result in lowering your current income tax bite. You may also be eligible for a matching contribution from your employer if your company offers one. So it’s a win-win. Remember that the sooner you begin, the sooner your money begins to grow tax deferred.   Stretch your dollars to make your contribution now. By putting the contribution off until the end of the year, you stand the risk of never making it at all.

Contributions to a deductible IRA. If you are eligible, then consider contributing to a deductible IRA. Remember that this contribution is a tax deferral technique, which means ultimately the tax gets paid when you take distributions from the account. Many of you will not be taking any distributions until you are retired so the funds have the chance of compounding their growth.   For individuals who are in a high tax bracket while they are working and think they will be in a lower tax bracket when they retire, it makes sense to receive a tax deduction while you are earning a higher income.   For those who are eligible to make these tax deductible contributions, you will see an income tax deduction that reduces your income dollar for dollar according to what you contributed up to the maximum amount. In 2011, the maximum contribution is $5,000.  If you are over age 50, you may increase your contribution by an additional $1,000.  By making your maximum contributions now, you are using tax breaks to help you to save for retirement!

Spousal IRAs. If you work but your spouse does not work, then you may be eligible to contribute to a Spousal IRA account for your non-working spouse. As long as the working spouse earns in excess of $10,000 annually, then you may use the working spouse’s income for determining eligibility.

Roth IRAs. Roth IRAs are one of the hottest retirement vehicles out there. Unlike other retirement plans where the account grows tax deferred, this type of retirement account grows tax free. What’s better than tax free? Similar contributions levels exist for this type of retirement account, but they have gross income limitations. Depending on your filing status and your income level, you may not be eligible to contribute.  You need to be mindful of the contribution limits as well as the phase-outs.

The advantages of the Roth IRA over the Traditional IRA are significant: tax free growth versus tax deferred growth. Roth IRAs have no age requirement establishing when you must begin withdrawing money from the account.  If you have a traditional IRA, then you must start making withdrawals when you are age 70 ½. As a beneficiary of a  Roth IRA, you may receive distribution income tax free.  If you are a beneficiary of a traditional IRA, then you must pay income taxes on the distributions you withdraw from the account.

Retirement Plan for the Self-employed. If you are self-employed, then you ought to consider establishing some sort of retirement plan that will shelter part of your income and reduce your income taxes. Depending on your income level and other factors, you can put away a lot of money, up to either $49,000 or 25% of your compensation, whichever is lower. This can be a significant tax savings strategy! In addition, if cash flow is an issue, you have until the due date of filing your income tax to contribute.  Keep in mind that the earlier you begin to contribute to your retirement plan, the sooner your retirement nest egg will grow.  There are many types of retirement plans for the self-employed, from SEPs to solo 401ks.  All of your options are worth exploring with your CPA or financial advisor to help determine the most appropriate plan for you.

Deferred Compensation. If you are employed by a company that offers a no- qualified deferred compensation plan, you may want to consider participating.  Deferred compensation is worth exploring because it will reduce your income and therefore result in lower taxes. Here is a bonus: you may be eligible to reduce your income by more than what you could have contributed to a qualified retirement plan. However, you must be aware of the inherent risk with this type of plan. The amount you defer now becomes a general asset of your company so if it should go bankrupt, you could lose all or part of your deferred compensation. If the company does poorly or even goes out of business, you will have to stand in line to receive your pay along with all the other creditors.

Saving For College through 529 Plans. When looking to save for college do not overlook 529 plans. There are a handful of states that grant tax deductions for the contributions you make to 529 plans.   The money grows tax free until you take it out, provided that it is used to pay for college. If you use the funds to pay for expenses other than education, you will have to pay a tax and possibly incur penalties. You need to exercise extreme caution by evaluating all the different states’ plans as well as other options and tools to fund for education.  I think many of these tax deductions will eventually disappear as state governments seek ways to boost revenue.  So if you are eligible to contribute to a 529 plan, you should take advantage of the opportunity today.

Mortgage points on your home. It is amazing how often you might overlook the points you paid to secure the mortgage on your home.  If you are buying the home for the first time, points paid to acquire the mortgage should be deducted for the year in which they were paid.  If, however, you are simply refinancing your mortgage to secure a lower rate, then the points you paid are deductible over the life of the mortgage!  It’s one of the most overlooked tax deductions! Mortgage rates are low so it’s a great time to lock in and secure a lower mortgage rate that provides tax breaks as well!

Charity is essential. Now is a great time to clean out your closets! Spring time is a perfect time to rearrange your wardrobe and your home to decide what should be saved, stored and repaired and what should be given away.  If you find clothes that you know you will not wear next year or winter clothes that you never even wore this past winter, then it’s time for a Spring cleaning! You can give away old clothing, furniture, small household appliances, books and collectibles.  Pick your favorite charity and follow their guidelines for donations.  By following their guidelines you can receive a tax deduction.  Be sure to get a receipt for your donated items. 

Portfolio of dead assets. It’s also a good time to clean out your portfolio of dead assets or non-performing stocks, bonds, and mutual funds. Assets that are not performing as well as expected should be evaluated and possibly  sold.  A tax loss can be generated to either offset gains or offset other income on your 2011 tax returns. Keep in mind that in order to deduct losses, you will need to sell the investment. You may not claim a tax loss on the mere decrease in value; it must be sold.  Just because a stock went down in value does not entitle you to declare it as a loss.  Once you sell these poorly performing assets, then these losses are tax deductible. The net loss you can take in any given year is limited to a maximum of $3,000. It can be used to offset any income from your wages, dividends, interest, retirement plan distributions and more. This is huge deduction! If you have a loss greater than $3,000, then the amount in excess of $3,000 can be carried over into future years. So be sure to grab this deduction while you can!  Word of warning: make sure your brokers have all the cost basis of investments that you own. Otherwise when you sell a security with no cost basis, it will be reported as a 100% taxable gain!

Spring time is a great time of year to think about having a sound financial strategy in place and of ridding yourself of unwanted assets. Now is time to clean out your closets, financially and otherwise.  Later this year, you won’t be scrambling around with deadlines looming and no time to spare. You can breathe a little easier and enjoy the full value of your hard work.   You will be amazed at what a good feeling it is to know that you are taking full control over your complete financial life.  Now is the time to build your nest egg and watch it grow as well as capturing some possible tax deductions along the way.


year end tax planningAbout Jonathan Gassman

Jonathan Gassman, CAP®, CFP®, CPA, is a partner at Gassman & Golodny LLP, a New York City-based public accounting firm, and is co-founder of G&G Planning Concepts Inc., a financial planning firm, which, through the years, has evolved to be one of the leading wealth management firms in New York City.  G&G Planning Concepts, Inc. is an outgrowth of the original firm founded in 1926. The third-generation, family-owned firm passed from Grandfather Alexander Gassman to Father Mel Gassman to Grandson Jonathan Gassman in a succession that embodies the way the firm  lives up to its reputation as a  business that knows how to take care of its clients.  In the early 1990’s, Jonathan Gassman expanded the firm to encompass financial planning. Jonathan is also the co-founder and CEO of The Business Owners Resource Group, a team of highly skilled financial planners, attorneys, accountants, and bankers.

For more information, please see Gassman & Golodny LLP and the Business Owner Resource Group