Money Report: The investor’s December checklist

Money Report

Without knowing how Congress will resolve the issue of taxes for 2011 and beyond, end-of-year investment and tax planning will be a challenge to say the least. Still up in the air are not only the all-important income tax rates and brackets, but also the capital gains tax rate, dividend tax rates, itemized deduction phaseouts, the alternative minimum tax, the estate tax and more.

But regardless of the uncertainty, there are some important end-of-year items investors can attend to, while keeping an eye on whatever compromises Congress will adopt.

First, speak with your investment adviser and tax professional to determine the status of all your realized gains and losses for 2010, carryforwards from previous years and anticipated capital gains distributions from your mutual funds. Getting a tax bill from a fund that may be just recovering lost value doesn’t seem fair, but mutual funds must distribute realized portfolio gains and losses each year regardless of the total return of the fund. Many funds have taken interim gains and are planning taxable distributions this year.

Fortunately, some of these gains can be offset by realizing tax losses in other investments, as long as these investments are not in IRAs. When you take your realized losses, you must first match your long-term losses against your long-term gains and short-term losses against short-term gains.

Any remaining amounts can be used to offset up to $3,000 of ordinary income, with any excess carried forward to the following year. Remember, there are precise rules regarding the selling and repurchase of like or equivalent investments for tax purposes. At least 31 days must elapse between sale and repurchase; otherwise, the IRS may not accept the loss as a legitimate tax offset.

If you are selling shares of a mutual fund, and you have been reinvesting, make sure you include all prior taxable distributions in your cost basis, as well as take into account any stock splits and dividends. You don’t want to pay taxes twice on the same gain.

2010 has been a rough year for charitable donations, and many non-profits are hoping that traditional givers will return to prerecession levels in November and December. Remember, you can use a credit card to charge donations in 2010 — even though you will not pay the bill until 2011. But a mere pledge to make a donation is not deductible unless it is paid by the end of the year.

Required minimum distributions for IRAs, or RMDs, were waived in 2009, but are back in effect for 2010. If you were required to take a distribution in 2008, you will need to calculate your 2010 distribution using your current age and the value of your IRAs on December 31, 2009. If you turned 70 1/2 in 2009 or 2010 you will also calculate your RMD based upon IRA values on December 31, 2009; however, if you turned 70 1/2 this year, you can defer this distribution until April 1, 2011. Penalties for skipping a required distribution or taking too little can be 50% of the amount, so be sure you get this taken care of in a timely way.

Roth IRA conversions will be available in 2011 and beyond, but this is the first year the $100,000 modified adjusted gross income limitation has been repealed.

Additionally, for conversions completed this year, you have a choice of recognizing the income in 2010, or deferring half the conversion income to tax year 2011 and half to tax year 2012. You don’t have to make the election before the tax deadline of April 15, 2011, (or Oct. 15 with extensions), so hopefully we will know what our tax rates and brackets will be by that time. If you are over 70 1/2, you must take your RMD before your Roth conversion; you cannot convert a required distribution.

Comprehensive tax planning is one of the fundamentals of sound investing practice. Remember that rules regarding tax selling and deductions are complex; consult your tax and investment professionals to review these strategies, since there are many other individual factors which can affect your decisions.

Steven Weber is the investment advisor for the Bedminster Group, a fee-only advisor providing investment and financial counsel to clients in the Low Country since 1997.The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. In addition, this is not a solicitation to buy or sell any securities. Furthermore, the opinions expressed are solely those of the author and do not necessarily reflect those from any other source.