Manipulate Your Income... The most basic form of year-end planning involves pushing tax bills into the future by deferring income into the next year and accelerating deductions into the current year. One example would be to postpone an IRA withdrawal, another would be to prepay your Jan. 1 home mortgage interest in December. Unfortunately, it's not quite that simple these days.

You must be aware of the "side effects" of any action that changes your adjusted gross income (AGI) from one year to the next. Our example of postponing the IRA distribution would reduce your current AGI (good) but increase the next year's figure (bad). Higher AGI can increase the taxable amount of Social Security benefits; reduce or eliminate the ability to make deductible IRA contributions; "phase out" your itemized deductions and personal exemptions; and trim your write-offs for medical expenses, casualty losses, charitable gifts and rental real estate losses. Higher AGI could also cut back or eliminate the new tax credits for dependent children and education expenses, Roth and Education IRA contributions, conversions of regular IRAs into Roth IRAs and education loan interest deductions.

The bottom line: Consider the effects of potential year-end tax moves on AGI and AGI-related tax breaks for both this year and next, and implement only those ideas that will put you ahead over the two-year period.

Retirement Distribution Planning

It can make sense to put off distributions if you expect to be in a lower tax bracket in future years or to avoid the 10% penalty tax that hits most withdrawals from IRAs and qualified plan accounts before age 59 1/2. You can also consider taking your benefits in the form of an annuity. This avoids the 10% penalty and allows you to spread the income out. Also, retirement plan distributions (other than lump sums eligible for income averaging) will increase this year's AGI, which can result in the negative side effects mentioned earlier. IRA withdrawals can be taken to pay qualified higher education expenses for you, your spouse, or your child or grandchild without owing the 10% penalty. (You'll still owe income tax.)

Penalty-free IRA withdrawals can also be taken to finance a first-time home purchase for you; your spouse; or a child, grandchild, or ancestor of either you or your spouse. There's a $10,000 lifetime limit on withdrawals for this purpose.

If you have a 401(k) plan at work, now's the time to state how much you'll contribute next year. We suggest setting aside as much as you can stand.  This advice goes double if your employer makes matching contributions, which amount to "free money."

This time of year is also when employees must specify how much salary they will contribute to their medical and child-care flexible spending accounts. Tax-free withdrawals can then be taken from these accounts for medical and dental insurance premiums, uninsured medical and dental expenses, and child-care costs. By the way, if you leave a balance in your spending account at year's end, you'll lose the money. So make sure you drain the account.

These are just some of the many year-end tax savings strategies available to you.  For the best advice contact your tax planning professional. If you are an insurance, estate planning or taxation professional receiving this newsletter, please contact our office to introduce yourself and your services to us. We are always seeking to grow our referral network and expose professional services to our client base.

The purpose of this newsletter is not to give legal, estate planning or taxation advice. The goal is to stimulate thought for our clients and those professionals we network with. One should consult with a qualified professional prior to making financial decision's. If you do not have a relationship with a professional familiar with the current laws and would like to be introduced to one, please contact our office for a recommendation.  If you are a professional receiving this newsletter, please contact our office to introduce yourself and your services to us.  We are always seeking to grow our referral network and expose professional services to our client base.