TEXT OF INTERVIEW
Tess Vigeland: Time to take a break from all the holiday hoopla and consider some end of the year planning for taxes! All right, it’s not as fun as shopping, but trust me, making a few moves now can benefit you big time come tax day, especially once the debate over Bush-era tax cuts is resolved.
Enrolled agent Frank Degen has some tips for all of us, offered pro bono, no less. First up, I asked him about the home improvement tax credit.
Frank Degen People still have a few weeks left before Dec. 31 to get storm windows, storm doors, insulation purchased and installed in their homes. The credit is 30 percent of the first $5,000 of expenditures, so it maximizes at $1,500.
Vigeland: Yeah. Probably a little late to be putting solar panels on the roof at this point, right?
Degen: Yeah, I don’t think that’s going to happen, or even running out and buying an energy efficient automobile. Most people don’t, in the last couple of weeks, make up their mind just on a whim to do that.
Vigeland: One of the other issues, of course, is making sure that you max out your retirement account. Are there new levels for that this year?
Degen: Well, the level for 401(k), 403(b) is $16,500 for most taxpayers. If you’re 50 or over, you’re going to have a catch-up. Those are all out of payroll, so you must — if your company will allow you to make a change, in order to maximize, you have to do that or pay roll by Dec. 31. If you have an IRA, for example, that’s a little different; you can contribute that until April 15 of 2011 for 2010 credit.
Vigeland: I know that there’s been a lot of confusion about Roth IRA conversions. This is where you can convert a regular IRA to a Roth IRA, which means pre-tax to post-tax, right?
Degen: Correct. Up to $100,000, people couldn’t do it. So this year is golden for anybody who wants to do it. But there’s also a second reason why you may want to do it. And that is that the income that you’ll have to pay tax on — because don’t forget, as you said, it was pre-tax to post-tax — can be paid over your 2011 and 2012 tax returns. Though the taxpayer can make an election to report all the income on a 2010 tax return, if they so choose. This is a very tough question to give advice on. You hear the classic line “Speak to your tax advisor,” and I think this is a real one where you really need, because depending on your age, your goals and so on, some people may want to do this, others may not.
Vigeland: OK, well, we’ll go ahead and say that line, check with your tax advisor. Right?
Degen: Absolutely. Hopefully, an enrolled agent.
Vigeland: There you go. OK, now, flexible spending accounts. This is the time of year where people are running out to the drugstore to make sure they spend down those accounts, right?
Degen: Absolutely. There’s a rule called “use it or lose it.” One time, Dec. 31 was the absolute deadline. A couple years ago, the government did allow employers to institute a grace period up to mid-March. It was not a requirement; it’s an option. So your listeners may want to consult their human resources department. The one thing of note that your listeners should be aware of is that in the year 2011, there is going to be some change as to what is reimburseable under a flexible spending account.
Vigeland: Let’s move onto charitable contributions. Anything changing here, or is this pro forma?
Degen: No, it’s pretty much the same. The one thing that is required, that every contribution you make, regardless of amount, must be documented. You are allowed to take a deduction on your 2010 tax return, if you postmark the contribution by Dec. 31 and mail it to the charity. Or you put it in on a credit card. A lot of folks don’t realize that if you put it on a credit card now in 2010, you may not be paying it until 2011 or 2012 or 13 or 14.
Vigeland: Well, if you listen to this show, you know you better pay it off next month. And finally, I think a lot of people start taking a look at their federal taxes at the start of the year. But is this also a good time to take a look at your withholdings?
Degen: Yes, a lot of taxpayers don’t believe you, but the worst thing in the world is to get a refund. Because basically, who’s money are you getting back?
Vigeland: Yeah, you’re giving Uncle Sam a loan, right?
Degen: Yeah, so one thing to do is if you are getting a large refund. From a financial standpoint, it would be well worth your while to re-evaluate the withholding on your W-4. Though I must admit, Tess, from a psychological standpoint…
Vigeland: You love that refund.
Degen: …We can talk about this till we’re blue in the face, but taxpayers feel better if they get a refund, even if it’s only their own money.
Vigeland: I love that refund, man. I would much rather have that.
Vigeland: All right, Frank Degen, always great to talk to you. Happy holidays and thanks so much.
Degen: Thank you Tess. And best of wishes for a Happy New Year to you and all your listeners.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.
Donate now to get almost any thank-you gift.