With 2010 quickly coming to an end, now is the time to think about cleaning up and/or improving your personal finance situation. There are several items that, if performed before the end of the year, will save you on taxes, time, and money in 2011:
1. Converting from a traditional to a Roth IRA. In 2010, the $100,000 income threshold on converting from a traditional to a Roth IRA was lifted, allowing individuals of any income to make the switch. What’s more, for 2010 only, the taxes that must be paid from the conversion can be paid over the next two years (2011 and 2012). Keep in mind that if you do plan on making the actual conversion, you have only until midnight of December 31st, and not April 15th, to do so. The distributions that are received by December 31st can still be rolled over into a Roth IRA until March 1st of the following year, however, which is 60 days after they are received by the account holder.
2. Selling winning stocks. Investors who are in the two lowest income tax brackets (10% and 15%) and who sell their winning securities by the end of 2010 will pay no capital gains tax. This applies to long-term capital gains only, which are defined as the appreciation of securities (e.g., stocks, mutual funds) that have been owned for over one year. The no taxation benefit for investors who are in the two lowest income tax brackets will end in 2011, resulting in a 10% tax on long term capital gains in 2011.
3. Selling losing stocks. If you want to offset some capital gains on your income taxes, sell some of your depreciated stock in 2010. These losses can be subtracted from any capital gains that you have made. Leftover losses can offset up to $3,000 of your 2010 ordinary income. In addition, if your losses are greater than your capital gains and $3,000 of ordinary income combined, you can carry those losses over into future tax years.
4. Donating to a charity. Donations to non-profit organizations and charities designated as tax exempt under IRS code 501(c)(3) can be claimed as a tax deduction in the year that they are made. When making a donation, be sure to keep all relevant documentation related to the transaction and its net worth. This is especially important for donations valued at $250 and above, since the IRS will require a written receipt or letter from the benefitting 501(c)(3) organization.
5. Buying OTC drugs with your FSA. Starting in 2011, it will no longer be possible to purchase over-the-counter (OTC) drugs and other health consumables with your Flexible Spending Account (FSA) money. Consider stocking up on OTC medications now and using up the remainder of your FSA money for such items. When 2011 starts, you will have a stock of medicines and other health and wellness items that you purchased with pre-tax funds.