The Prairie Star: Montana Ag Newspaper

As the holiday season begins, often one is inundated with important tasks. During this busy time, it is important not to forget about the tasks associated with year-end investment planning in order to stay on track with the long term financial goals and year-end tax planning strategies to possibly take advantage of some tax savings. Remember that year-end investment decisions sometimes can result in tax savings. Below are some general recommendations that can be done between now and Dec. 31.

First, it is important to take time to review your overall portfolio to determine if it is necessary to rebalance investments. Is the portfolio still appropriate to meet the goals and objectives originally set forth? Have there been any changes in personal circumstances that may require an allocation change? This may be a good time to review the actual rate of return with the required rate of return in relationship to the portfolio’s time horizon. Has one asset class outperformed the others and now represents a larger part of the portfolio than currently desired? Does new money need to be directed into an asset class that deserves a greater weight in the portfolio?

One strategy often mentioned to reduce taxes and possibly redirect some funds is to sell poorly performing investments to realize losses, which can help offset other gains for the year. It is important to remember the wash sale rule when trying to realize a loss. A wash sale occurs when a security is sold at a loss and within a period beginning 30 days before and ending 30 days after the sale date, the same or a substantially identical security was acquired. In this case, no loss is allowed.

All gains and losses for the year will be offset against each other and the resulting gain or loss will be reported on the tax return. The maximum amount of losses that can be reported in any single year is $3,000. Any additional amount of losses for that year can then be carried forward to future years. Remember, tax considerations should not be the primary reason for any investment decision.

The timing of selling an investment is also crucial. Capital gains tax rates vary based on whether the security has been held for greater than one year (long term) or less than one year (short term). Capital gains tax rates for long term capital gains (LTCG) in 2009 are taxed at a maximum of 15 percent and at 0 percent for those in the lowest two tax brackets. The tax rate for short term capital gains (STCG) in contrast, is generally higher, as STCG are taxed at the ordinary income tax rates. This can apply to both the sale of investments and other assets.

As the year end approaches, taxpayers can get a good idea of what marginal tax bracket they will be in and how much will be owed for taxes. Year end tax planning primarily concerns the timing of reporting income and deductions. Farm and ranch owners should work with their accountant to recognize income when the tax bracket is lower or pay deductible expenses when the tax bracket is higher. If you know the rate at which the next dollar of income will be taxed, engaging in planning will prevent being pushed into the higher tax bracket.

Taxpayers need to be aware of deductions that are available to help prevent them from being in the higher tax bracket. The 2009 section 179 limit is $250,000. Remember; always consult your tax advisor, as just buying depreciating assets may not be in your best interest. Other options available include the Montana Medical Savings Account (not to be confused with the federal health savings account that requires a high deductible plan to participate). Information on this can be found at the Montana Department of Revenue website at mt.gov/revenue.

Education Plans may provide some tax benefit to a taxpayer depending on the state of residency and the plan used. In addition another strategy is to prepay the college costs for next year by December to take advantage of the education tax credits. A taxpayer would need to consult their tax advisor to make sure they qualify for the credits.

Retirement plan contributions may also reduce taxable income. By setting up or contributing to an existing retirement plan, you may receive a deduction in the current year, and possibly qualify for the savers credit. If a taxpayer is at least 50, the amount allowed to contribute and deduct may be more.

Shifting income to family members who are in lower tax brackets may also be a viable strategy. A taxpayer must know the kiddie tax rules, which apply to income, earned and unearned, by children (or dependent adults meeting certain criteria). The kiddie tax now applies to those under 18, as well as those over 18 whose earned income doesn’t exceed one-half of their support. In addition kids between 19 and 23 who are full time students and whose earned income doesn’t exceed one-half of their support are also subject to the kiddie tax.

Given recent legislative changes involving taxes, and the current economic environment, it is essential to remain knowledgeable about opportunities and challenges regarding financial decisions, particularly during this year end period. As we, in all areas, look back with thanksgiving and ahead with anticipation, we must not forget the financial sphere of our lives; this may be the ideal opportunity to consider a New Year’s Resolution, such as forming or updating a Financial Plan, putting in place the legal documents needed to assure financial well-being of your family, or making a commitment to “pay yourself first” through a disciplined approach to investing and saving over the coming year. To avoid becoming overwhelmed, consider sitting down with a financial planner and/or a tax planning professional to discuss these and other options available to your specific situation.

This article is meant to be general in nature and should not be construed as financial, legal or tax advice related to your personal situation. Waddell & Reed does not provide legal or tax advice so please consult a qualified professional regarding your situation prior to making any financial decision. For more detailed information please consult your advisor or call Thomas Tilleman, a Financial Advisor and Certified Financial Plannerª professional with Waddell & Reed at 866-576-4662. Waddell & Reed, Inc. Member SIPC.

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