Planning Ahead

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 that was signed into law on December 17th clears up the uncertainty hanging over tax and financial planning decisions – but only until the end of 2012. Here are a few things to think about as you plan for the next two years:

• Income tax rates will hold at their current levels for 2011 and 2012, and tax rates for long-term capital gains and qualifying dividends will remain the same as well. You now have two more years to sell appreciated investments at the current 15% maximum long-term capital gains rate, and if you are able to manage your income into the 10% or 15% marginal income tax bracket, the special 0% rate will apply to you. If you have stock options to exercise, you can do so at the maximum federal income tax rate of 35%. Now may be a good time to review your cash flows over the next 24 months to see if anything should be changed in your diversification or income recognition plans.

• Social Security taxes will be 2% lower in 2011, reduced from the current 6.2% to 4.2%. If your earnings are over the $106,800 wage base limit this translates into a $2,136 savings. Self-employed individuals will owe 10.4% vs. 12.4%, so if you plan on doing consulting work in retirement 2011 is the year to recognize as much income as you can! The tax-free distribution to charitable organizations from IRAs was retroactively reinstated for 2010 and extended through 2011. If you are over 70½ (and therefore must take a Required Minimum Distribution or RMD) you can transfer up to $100,000 from your IRA to a charity and not pay income taxes on the distribution. If you have other resources for your income needs, want to benefit a charity, and don’t want to pay income taxes on your RMD you should consider paying your RMD to a charity versus taking it as income. Because the change took place so late in the year, you can treat distributions made from an IRA to a charity in January 2011 as if it were made in 2010.

• The federal estate tax went through some major changes, but those are all temporary too. The estate tax exemption amount is now $5 million per person and the top estate tax and gift rates are 35% until the end of 2012. For the next two years, if one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse. All these changes are a huge benefit to families, but there is no guarantee that they will be extended beyond the current two year term. Many people have delayed updating their estate plans until the new rules were set. I think this is as good as it is going to get, so it’s time to set an appointment to get your documents updated if they are over five years old. We’re happy to help with a referral to an attorney if you need one, and will attend the meeting with you as well if you think it will help overcome procrastination.

Remember, we are always here to work with you to determine the best plan of action to reach your goals. If you have any questions or want to meet to review your situation, don’t hesitate to contact us.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Eliminating Financial Clutter

As we draw closer to the deadline for institutions to furnish your annual tax statements, you may be wondering how long you need to keep tax and other financial documentation. Gathering your income tax data is a good time to clean out your filing cabinets and shred your utility bills from 1982 and brokerage statements from 1997.

Tax returns and related documents should be kept for seven years. If the return details a potentially taxable investment, keep it as long as you own the asset plus seven years. I recommend clients use the black binder we give you when you become a client of TAAG to organize your monthly brokerage statements, trade confirmations, and other investment related documentation.

You can shred buy and sell confirmations after you have compared them to your monthly statement. Keep your monthly statements until December and put your December statement in the file with your tax return for that year. If you ever need an historical brokerage statement, we can provide it to you. Most financial institutions are required to keep your statements for seven years. TAAG will track the cost basis for any investment we make in the taxable accounts we manage. Each January we will provide you with the realized gain and loss information you will need for taxes.

You can also use this process with your ATM receipts, deposit slips, and credit card receipts not needed for taxes or a warranty – shred them after comparing to your monthly statement. Canceled checks can be disposed of after a year if not used for a tax related purchase or deduction and your monthly bank statements, after seven years.

Bills can be tossed after six months and monthly credit card statements after a year if not being used for tax purposes.

Records to retain for the longer term include the paperwork from your home purchase – mortgage application, appraisal, deed and your sales contract. You should keep these at least as long as you own your home, longer if you prefer. For tax purposes, make sure you keep records and receipts from any improvements you have made that may reduce your tax bill when the house is sold.

If you have updated your estate planning documents in the past year, make sure to dispose of the outdated versions of wills, powers of attorney or health care directives. If you have recently made changes, please let us know if any of the documents we have in your file have been replaced or accounts should be re-titled.

There are a few documents you need to keep for life, including birth and death certificates, marriage licenses, adoption papers, and divorce decrees. It is best to keep these in a safe deposit box or fireproof safe in your home.

If you set up a system to purge unnecessary records on a regular basis, assembling the needed documentation at tax time will not feel like a chore.

By Chris Carleton, CFP
clcarleton@taaginc.com
www.taaginc.com