Most people wait until the last minute for almost everything ... including their 2010 New Year's resolutions. But often, procrastinating can cause a real loss, especially this year.
In 2010, there were several major changes to the U.S. tax code that will significantly impact your tax liability and investment planning.
First, the Roth conversion rules have changed for 2010. For the first time ever, there is no income limitation (maximum) for those planning to convert their IRA or 401(k) to a Roth IRA. This new rule will also apply in 2011 and beyond. Investors will now be able to spread their conversion tax over two years. If you process the conversion in 2010, you have the option of paying the tax in 2010 or splitting the tax over 2011 and 2012. That could provide a great benefit for budgeting purposes.
Next, the Bush tax cuts are set to expire at the end of 2010. Based on that expiration, the long-term capital gains rate is increasing from 15 percent to 20 percent. Therefore, an investor with a security or piece of investment real estate with a significant gain can sell it in 2010 and only pay 15 percent tax on his or her long-term gain (if the investment was held for more than 12 months). Waiting until January 1 will cost the investor 5 percent more tax. For example, if a person made a $10,000 return on his investment, selling it after January 1 will cost him $500 more. For a $100,000 gain, it will cost him $5,000 more. So if he is planning to sell, it would be wise to sell this year.
Lastly, consider business owners taking money out of their companies. Often, they take out "qualified dividends." These dividends are taxed at the 15 percent rate. After January 1, their tax liability will increase to their ordinary income rate, which could be as high as 39.6 percent for those in the highest tax bracket. So this may be the most opportune time to take out company money at a significantly discounted rate. However, this requires immediate action, as this rule also expires at the end of the year.
One caveat is that these tax changes are imminent based on current regulations. President Obama, however, may make a change to the law prior to year end. The discussion so far has revolved around extending the Bush tax cuts for those with incomes less than $200,000 (who file single) and $250,000 (if filing jointly). We must wait and see what is decided in Washington.
So clean the dust off that 2010 resolution list and make some headway—you still have a few weeks to go.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Fairfax, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.