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Why is Santa Claus so jolly come
Christmastime? Because he most assuredly gets a huge tax deduction by donating so many
gifts to all the good boys and girls. (You didn't think Santa was exempt from paying
taxes, did you?)
As the holiday season approaches, the last
things on your mind are probably taxes and retirement planning. Yet, putting a little
effort into your retirement account(s) and your 2000 and 2001 taxes now could help make
you as jolly as our man in red.
To get you started, we've put together this little package
of issues and ideas on how to minimize your tax bite and maximize your retirement balance.
November
At many companies, November is open enrollment time, when
employers give their workers a chance to change their health and retirement benefits
choices for the coming year. Don't miss employee meetings that may offer the opportunity
to ask questions about your benefits. Make sure you're not missing out on an opportunity
to save on taxes by making pretax contributions to a retirement or medical account. Also,
as the holiday crush builds, don't miss the key deadlines to return your election forms.
November is a popular month for open enrollment, with the
changes going into effect Jan. 1 of the following year. Some companies also have open
enrollment periods in May and June, with changes effective July 1.
November and December
If you own equity mutual funds in a taxable account, you
might be getting a capital gains check at this time of year.
(If you own equity mutual funds in an IRA or a
defined-contribution plan, you won't have to worry about getting a capital gains check:
the custodian reinvests capital gains distributions.)
Capital gains payments might be bigger than you expect this
year, thanks to stock market declines. Fund managers may have bailed out of stocks when
the market tanked, selling shares earlier than expected and triggering a short-term
capital gain. Short-term capital gains are taxed at a higher rate than long-term capital
gains. Further, they may have sold shares to raise cash to pay redemptions to those
shareholders who cashed out of the fund, seeking to minimize their own losses.
When should you expect this money? Each fund writes these
checks according to its own schedule. But, most come either in late November or by
mid-December.
Capital gains payments count as income, on which you must
pay taxes. If the gains are high enough, they could push you into a higher tax bracket.
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"If you plan to open a qualified
retirement plan for the 2000 tax year, you may want to talk with your financial advisor by
the end of the first or second week of December. It can take up to two weeks to get the
paperwork ready."
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— Joel
Framson, CPA and CFP with Glowacki Framson Financial Advisors in West Los Angeles, Calif.
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Tax tips:
- If you're looking for a way to offset a capital gains
payment, the year's topsy-turvy equity markets may be a blessing in disguise. If some of
your equity investments are underwater, you might want to sell them and take the loss to
offset the capital gain.
- Get your taxes in order. Collect your receipts for business
expenses and charitable deductions. Make a list of forms and statements you expect to
receive from employers, banks and brokerages, such as 1099s and W-2s. Check them off as
they arrive in January.
- Make an appointment to see a tax planner. This is a good
time to get started on a tax strategy for next year. Most tax planners will welcome you
now, when they aren't under the April 15 crunch.
Retirement-planning tips:
If you're one of the fortunate few who expect to get
through the winter holidays with extra cash (not this author), ask your human resources
department if you can boost your contributions to your retirement plan at work (presuming
you haven't already maxed them out for the year). Remember: A one percent increase now
could net you thousands of extra dollars in retirement. Consider this a little holiday
present to yourself for the future.
Open an IRA. If you don't have a work-sponsored retirement
plan, or if you do and meet the income limits, think about opening a tax-deductible IRA.
Sure, you have until April 15, 2001 to open an IRA for the 2000 tax year, but why not do
it now and get an extra four months of interest?
December
Dec. 29 is the last business day of the tax year, and the
last day you can open a new 401(k) plan if you're an employer or a new Keogh plan if
you're self-employed. If you plan to open a retirement plan for the 2000 tax year, you may
want to talk with your financial advisor by the end of the first or second week of
December. It can take up to two weeks to get the paperwork ready, said Joel Framson,
CPA/personal financial specialist and CFP with Glowacki Framson Financial Advisors in West
Los Angeles, Calif.
Tax tips:
- If you turned 70ý this year, you will have to take your
first required minimum distribution by April 1, 2001. But, if you want to minimize the tax
hit for next year, take your first payment in 2000. Otherwise, you'll be taking two
required distributions in the same year, advises Darrell Canby, president of Canby
Financial Advisors L.L.P. of Framingham, Mass.
- If you turned 70ý in 1999, remember to take your second
required minimum distribution by Dec. 29, 2000 (you had to take the first one by April 1).
If you don't, you'll be liable for a 50 percent penalty on the amount you were supposed to
withdraw.
- Pay deductible expenses for 2001 early and boost your tax
deductions for 2000. You can prepay your January mortgage bill, state income taxes for
2000, and real estate taxes and take those payments off of your 2000 tax return, said
Philip Cook, a certified financial planner in Torrance, Calif. He recommends that if you
want to prepay your mortgage, send the check in by mid-December at the latest. That way,
the payment should arrive in time to be credited for 2000.
- Find out if the IRS owes you a gift (i.e., refund). Run a
rough tax computation to figure out if you will owe taxes or the IRS will owe you. If
you're due a refund, file your taxes as soon as you can in January (the earlier you have
the money, the sooner you can invest it and get it working for you). Even if you aren't
owed a refund, it's a good idea to finish your tax returns early — you can still wait
until April to send in the return.
January 2001
Jan. 15: If you're self-employed, your fourth-quarter
estimated tax payment for 2000 is due.
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"You can prepay your January
mortgage, state income taxes for 2000, and real estate taxes and take those payments off
of your 2000 tax return."
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— Philip
Cook, a certified financial planner in Torrance, Calif.
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Retirement-planning tips:
- If you plan to contribute to an IRA for 2001, do it early
and start collecting interest right away. You could lose 15 months of interest if you wait
until April 15, 2002 to contribute to your IRA for 2001.
- Think about your IRA beneficiary choices now. If you have
money in an IRA or defined-contribution plan and will turn 70ý in 2000, you will need to
designate your beneficiaries by April 1. Further, you'll need to decide which method
you'll use to calculate your required minimum withdrawals. For more information, read
Avoid Expensive Mistakes When Making IRA Beneficiary, Distribution Choices. The choices
can be complex and the ramifications permanent — don't wait until the last minute.
Other Key 2001 Dates
April 1: This is your required beginning date if you have
an IRA or defined-contribution plan and you turned 70ý in 2000. You must take your first
minimum distribution from the account by this date in order to avoid paying a substantial
penalty. The beneficiary and withdrawal calculation formula in place at this date are
irrevocable.
April 16: Tax returns for the 2000 tax year are due. If
you're self-employed and file quarterly returns, your first-quarter estimated tax payment
for 2001 is due.
This is also the deadline for opening a Roth IRA, SEP-IRA
or traditional IRA for the 2000 tax year. It's also the last time to make contributions to
those accounts and have them count toward the 2000 tax year.
Oct. 1: If you want to open a SIMPLE IRA or SIMPLE 401(k)
plan for your business for the 2001 tax year, the plan must be opened by this date.
Dec. 31: If you turned 70ý in 2000, you must take your
second minimum distribution from your IRA or defined-contribution plan by this date. |
