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End-of-Year Tax Planning Considerations

Last Updated: 12/8/09

As the New Year approaches, taxpayers around the nation are thinking about making gifts or other financial moves before January 1 that will benefit them come April 15, 2010. Here are some year-end considerations of particular interest to seniors.

A Reprieve on RMDs

Last year, as the stock market plunged and the economy teetered on the brink, Congress suspended the penalty for seniors who fail to take the required minimum distribution (RMD) from their IRA and employer retirement accounts in 2009.

There is normally a penalty for failure to withdraw once the account owner reaches retirement age -- after age 70 1/2. Taxpayers generally must begin taking annual distributions from their retirement accounts by the April 1 occurring after they reach age 70 1/2 or pay a whopping 50 percent excise tax on the amount that should have been distributed but was not. To prevent seniors from being forced to sell stocks in a down market, Congress suspended the required minimum distribution rule for 2009.

If you turned age 70 1/2 before 2009, you would normally be required to take your 2009 distribution by December 31, 2009. If you turned or will turn age 70 1/2 in 2009, you would normally be required to take your required distribution no later than April 1, 2010. In either case, you will not need to take this distribution. The new law also waives 2009 distributions for beneficiaries of inherited IRAs and employer retirement accounts. However, taxpayers still must take their 2010 distributions no later than December 31, 2010.

Gift Threshold Now $13,000

The amount that may be gifted each year to any one person without the need to file a gift tax return rose from $12,000 to $13,000 on January 1, 2009. The increase to $13,000 means that more can be given away for estate tax planning purposes. For example, a married couple with four children will be able to give away up to $104,000 in 2009 with no gift tax implications.

Charitable Donations From an IRA Not Taxable

As part of the large financial rescue package, Congress retroactively extended the IRA charitable rollover provision from January 1, 2008, through December 31, 2009. This reinstates the rollover exemption that was part of the Pension Protection Act of 2006.

Previously, those wishing to make charitable donations using money in their IRA accounts were required to withdraw funds from their IRA and pay income tax on the withdrawal before they could take a charitable donation deduction on their annual tax returns. But under the new law, so long as the donation is transferred directly from a traditional or Roth IRA or rollover IRA account to an eligible public charity, the donor doesn't have to pay any income tax on the withdrawal at all. As far as the federal government is concerned, money donated to the charity simply is not income. (But note that the transfer is no longer eligible for the charitable tax deduction, either.) For details and restrictions, click here. For more from the IRS on this and other charitable donation rules, click here.

Rollover Retirement Distributions

Those 70 1/2 or older who took a distribution from a retirement plan or IRA earlier in the year may be able to avoid tax on the payout by rolling it over into an eligible retirement plan (including an IRA) before December 1, 2009.

Retirement Contributions

A great way to reduce taxable income is to contribute funds to an IRA or to your 401(k) through work. In addition, the income on assets in the IRA or qualified plan are deferred until the withdrawal is made. The contribution limits for traditional and Roth IRAs remain the same for 2009 as in 2008: $5,000 for a single person and $10,000 for a couple, or $6,000 for a single person if over 50 and $12,000 if both spouses are over 50 and married. If you are self-employed, the contribution limite for a SEP-IRA or a simple IRA is $49,000 per year. Keep in mind that there are limitations on the contributions that may be made based on income and other specific data.

Take Advantage of Losses

Even though the market has posted gains since the dark days of last March, many investors still have long-term capital losses on investments held longer than one year. You can deduct up to $3,000 of these losses a year against ordinary income, with the excess carried forward for use in future years.

New Roth Rollover Rules Take Effect Jan. 1

Before January 1, 2010, you can convert a traditional IRA to a Roth IRA only if your adjusted gross income is less than $100,000. The income limit is lifted on January 1, at which point anyone will be able to rollover a traditional IRA to a Roth. Roth IRAs grow tax-free, but you'll have to pay taxes when you convert a regular IRA to a Roth. However, the tax bill can be spread over two years. For details on Roth rollover rules from Kiplinger.com, click here. For an article on the benefits of Roths for heirs, click here.

If you have questions about how to take advantage of tax-saving opportunities before year's end or to discuss elder law issues with an attorney, please email the Elder Law Center or call 630-844-0065. The Elder Law Center is located in Aurora, IL, Kane County, in the Chicago Western Suburbs.