We have much to be thankful for this holiday season, and for many the first item on the list is that 2008 will nearly over. It’s been an eventful year, historic in many important ways. But the history it’s made in financial markets has been on the infamy side of fame. That’s just how it is. Life is not an Irish blessing. The road may not always rise to meet us, and, at least in investing, the wind may not always be at our backs. Yet as brutal as 2008 may have been, we can make it a little better if we take advantages of year-end moves that may just help us turn some lemons into lemonade.
Regardless of one’s outlook, there are nearly always tax, income and investing moves to be made at year end to improve one’s financial situation. I will touch on some common examples. As always, for tax advice you need to consult with a tax professional. Legal advice requires and lawyer and you should always review your personal financial situation with a licensed professional. (If you would like a more comprehensive piece on year-end planning, contact me and my office will send it out.)
The first move is to always check on employer sponsored retirement plans. While we have until tax filing to contribute to IRAs, employer plans work on calendar years. Make sure you have put in the appropriate amount into your retirement based on your long-term financial plan.
Individuals with taxable investment accounts will want to open the statements and check for gains and losses. It may make sense to sell some winners and losers, only losers, or only winners, and book the gains and losses. Every case is different and it will depend on one’s personal situation and one’s view of the future.
For example, if one expects their taxes to be higher in the near future, they may want to take the gains and save the losses. If they have realized other big income gains this year and expect their income to be lower in the coming years, they may want to do the opposite. People in the two lowest tax brackets may not have to pay capital gains taxes at all this year through 2010, due to a provision of the Bush tax cuts that may disappear. Individuals in these brackets may want to sell and reestablish a higher tax basis.
Other opportunities involve playing with income and deductible expenses. People who expect to either be in higher tax brackets next year because of promised increases or because they expect to earn more, will want to do what they can to shift income to 2008, an option easier for the self-employed that employees. They will also want to pay all the deductible expenses as possible next year, holding off on charitable contributions and property tax payments till January.
People who expect to be in more favorable tax situation in 2009 will want to do the opposite. Prepay deductible expenses now. Cut that check to the church and your favorite charity. Prepay property tax. Push the income back, if possible.
Again, it is smart to consult your financial professionals before year-end to develop a strategy that meets your needs. It must be personalized to your situation. But understand that regardless of what your situation is, there are probably smart year-end moves you can make to improve it.