As 2010 draws to a close and 2011 looms, we are reminded once again that taxes -- one of life's two unavoidable certainties -- are actually much less certain than some of us might think. The changing tax policies and legislative developments on tap for 2011 are significant both in terms of the sheer number of changes and of their potential impact on businesses and taxpayers.
The expiration of a number of existing policies and the changes in store for 2011 and beyond represents what will be for many Americans a sweeping and notable tax increase. By any measure, Jan. 1 is looming as one of the most significant legislative deadlines in recent history.
With the New Year just weeks away, now is a particularly important time to focus on year-end tax and financial planning. Given the ups and downs of the market and the economic uncertainties of the past few years, maximizing your income and identifying and addressing your tax planning priorities is more important than ever, whether you are mid-career or approaching retirement.
While there are a number of year-end tax and financial planning strategies that can literally and figuratively pay off for you, there are a few high-profile financial issues that consumers need to be particularly aware of before 2011 rolls around. Understanding and addressing these issues now can potentially minimize the impact of the upcoming changes on both businesses and bank accounts.
Maybe the most important piece of the financial planning puzzle is the looming deadline for a Roth IRA conversion. While April 15 is still the deadline to make traditional and Roth IRA contributions for 2010, the deadline for conversions is Dec. 31. As of this year, the government permanently eliminated the income and filing status restrictions on converting a traditional IRA to a Roth IRA. The upshot is that the future growth of your retirement account is completely tax free -- and it's not too often you can say that. By converting this year, you can lock in the current tax rates, something that sounds awfully appealing when we look ahead to 2011.
Also, it is important to take note that this year you have the additional option to defer taxes for the next two years -- for 2011 and 2012. While the appeal of converting now and capturing the current low tax rates, and the advantages of a Roth IRA (including tax-free income, no mandatory minimum distributions and tax-free at death) make a Roth conversion a great option right now for many of us, it is important to talk to a qualified financial planner to make sure you are weighing your options thoughtfully.
Another important pre-2011 issue for business owners is the end-of-year deadline for setting up a qualified retirement plan. Many qualified retirement plans, including some profit-sharing and 401(k) plans, must be established before the end of this tax year for those of us who want to make 2010 contributions. This is another way to accelerate income in 2010 and avoid unnecessary 2011 penalties, and, because the contribution deadline can be extended as long as the plan itself is in place by Dec. 31, moving forward on this now instead of putting it off for 2011 makes a lot of sense.
Homeowners also need to be paying attention. The federal $1,500 energy tax credit available to eligible homeowners who make qualifying energy-efficient home improvements in 2009 and 2010 also expires at the end of the year. Homeowners who have made or are considering making those upgrades to their residence will be kicking themselves if they leave that money on the table just because they waited a few extra weeks.
With all the 2011 upheaval looming, it is not unreasonable for the average taxpayer to feel a little overwhelmed. Confusion and some degree of anxiety are not uncommon reactions. But as a fellow by the name of Winston Churchill once said: "Let our advance worrying become advance thinking and planning."
Proactive planning now and strategic 2010 decision-making can potentially save a lot of time, money and headaches in 2011.
Mark Lloyd is the founder of The Lloyd Group Inc., which serves the distinctive financial needs of those nearing retirement and those already retired. He hosts a weekly radio show called "Focus On Retirement" that can be heard in Gainesville on 103.7-FM WXKT at 9:30 a.m. Saturdays and at 7:30 a.m. Sundays. His website is www.thelloydgroupinc.com.