2011 Q3 | Choosing the Right 401(k)

2011 Q3 | Choosing the Right 401(k)

Many companies offer employees a choice between two 401(k) plans. The version with which you’re probably most familiar As before, you can choose to defer some salary and defer the income tax as well. You’ll also defer the tax on any investment earnings. However, when you withdraw tax-deferred earnings and tax-deferred investment income, you’ll owe income tax. You’ll probably owe a 10% penalty on withdrawals before age 59 1/2, too. Another option you may have is a Roth 401(k). With this account, you’re not deferring income tax, so you’re contributing after-tax dollars. Again, you wont owe tax on any investment income inside the plan. After you’ve had a Roth 401(k) for 5 years and after age 59 1/2, all withdrawals

2011 Q3 | Adjusting for the AMT

2011 Q3 | Adjusting for the AMT

Many taxpayers owe the alternative minimum tax (AMT) rather than the regular income tax. Officially, the AMT has two tax rates: 26% and 28%, depending on your income. The AMT also has an exemption amount that phases out with AMT income over $112,500 (over $150,000 on a joint return). As the AMT exemption phases out, your tax rate actually might be 32.5% or 35%. Thus, some taxpayers who pay the AMT will owe as much as 35 cents in tax for every extra dollar of income they report, as opposed to the “official” 26 or 28 cents on the dollar. The higher the AMT rate, the greater the benefit of deferring tax with a traditional 401 (k).

2011 Q3 | Avoid Higher Medicare Premiums

2011 Q3 | Avoid Higher Medicare Premiums

For several years, upper-income Medicare enrollees have had to pay higher-than-standard premiums for Medicare Part B, which covers doctors’ bills and other outpatient charges. Starting in 2011, those same seniors also owe elevated premiums for Part D, which covers prescription drugs. These added charges use income “cliffs,” meaning that you pay the full amount if you go over the threshold by even $1. Many Medicare enrollees pay $96.40 a month for Part B, and some others pay $110.50 or $115.40 a month. (This depends on when they enrolled in Part B and whether the premium is deducted from their Social Security checks.) However, you will pay much more this year if your modified adjusted gross income (MAGI) exceeds certain levels.

2011 Q3 | With Savings Bonds, Prepaying Tax May Be a Good Tactic

2011 Q3 | With Savings Bonds, Prepaying Tax May Be a Good Tactic

U.S. savings bonds can be good investments, especially if purchased for young children. They’re issued by the federal government, so bond holders don’t have to worry about a default. Yields are comparable to the yields on bank accounts. They’re fairly liquid: owners can cash in savings bonds one year after the purchase and can redeem these bonds with no loss of interest after five years. (If you redeem savings bonds within five years, you’ll lose the interest for the latest three months.) Taxes, too Owners of savings bonds also receive tax advantages. The interest is exempt from state and local income tax. Savings bonds are issued by the U.S. Treasury Department so they enjoy this tax treatment, along with all

2011 Q3 | Tax-Free Savings Bonds

2011 Q3 | Tax-Free Savings Bonds

The interest from savings bonds you cash in may be tax-free. That can be the case if you use the money for college tuition and fees. Several conditions apply. For example, you must have been at least age 24 when you bought th bonds. Either you or your spouse must own the savings bonds. The bond proceeds may be used for the owner’s education, the owner’s spouse’s education, or the education of a dependent for whom the owner claims an income tax exemption. Income limits exist for this tax benefit. For completely tax-free income, your modified adjusted gross income (MAGI) in 2011 must be no more than $106,650 on a joint tax return or $71,100 on other returns. The tax

2011 Q3 | Use Appreciated Assets for Charitable Donations

2011 Q3 | Use Appreciated Assets for Charitable Donations

Writing a check is the easiest way to make charitable contributions. However, donating appreciated assets can be more tax-efficient. That’s true if the donated assets have been held longer than one year and, thus, would qualify for long-term capital gains tax treatment on a sale. Example: Mark Parker wants to donate $5,000 to a local animal shelter. If he writes a check for $5,000, he’ll get a $5,000 tax deduction. Mark’s cost for this deduction is $5,000, after-tax. Instead, Mark goes through his portfolio and finds a stock he bought in 2009 for $3,000 and, thus, would qualify for long-term capital gains treatment. That stock now sells for $5,000. Mark decides to donate the stock to the animal shelter. With