Expiring Tax Provisions

It seems like every year there’s a slew of tax breaks in danger of expiring.  Sometimes Congress extends the tax break, other times they actually expire and fall by the wayside. 2011 is no different, with 3 potentially useful tax breaks on the cutting room table.  Those who may be able to benefit from these tax breaks should consider taking advantage of them soon, before it’s too late.

  • Sales Tax Deduction – Individuals who itemize their deductions can elect to deduct their sales tax or their state and local income taxes, whichever is greater.  There are seven states without a state income tax, so those residents would surely elect the sales tax deduction.  Residents of other states may find that they paid very little in state income taxes and may decide to elect the sales tax deduction instead.  For those who are taking the sales tax deduction and considering a large purchase, such as a new car, it may be worthwhile to complete the purchase this year in order to maximize this tax benefit while it’s still available.
  • Energy Efficiency Credit – Individuals can take a credit of up to $500 for making energy efficient improvements to their homes, including upgrades for roofs, doors, insulation, windows, furnaces, air conditioners, and many others.  There are limitations on the amount of eligible credit for the various improvements, and you can find a list of those here. It’s also important to note that unlike many other credits, this one is a lifetime credit–so if you’ve utilized all of the $500 credit in the past, you cannot take any more regardless of your qualified expenditures now.  However, if you haven’t benefited from this tax break yet, and are considering making energy efficient improvements to your home, you may want to do so before year end.
  • Qualified Charitable Distributions from IRAs – Individuals older than 70 ½ can make tax-free distributions from their IRA to qualified charities.  The distribution is not includable in the donor’s income, but it is not deductible as a charitable donation either.  This provision primarily benefits individuals who are charitably inclined but don’t have enough deductions to itemize.  The qualified charitable distributions will count towards an individual’s required minimum distribution (RMD) for the year, allowing those who don’t need the money from their IRA to donate it without being taxed on it.  With year-end fast approaching, individuals who have yet to take their RMD may want to consider this option.

Each of the tax breaks above had been due to expire at some point in the past but was subsequently extended at the last minute.  It is possible that Congress will extend these breaks again, but nothing is certain given the deficit and debt problems currently facing our country.

If you think you may benefit from any of these tax breaks, please be sure to consult with your accountant to see how these tax savings may apply to your specific situation.

RMDs and Charitable contributions

If you have IRA accounts and are over age 70 ½, then you probably know about the Required Minimum Distribution (RMD) rules. These IRS rules require you to take money out of your retirement accounts each year, whether you need the money or not.

This money could be spent or re-invested back into a taxable investment account to allow it to continue to grow. Some people deposit this money to their checking account, and eventually use it to make a charitable contribution to the charity of their choice.

Fortunately, the government recently extended a provision through 2011, which allows individuals over age 70 ½ to exclude up to $100,000 from their gross income if it is paid directly from an IRA to a qualified charity. In addition, that excluded amount can be used to satisfy the RMD for the year.

This could potentially be a much more tax-efficient way to make charitable contributions than by depositing the RMD amount in your bank account and then writing a check for charity. If you’re a Merriman client, we can help you complete the paperwork accordingly, just give us a call.

To find out more information on this valuable topic, please discuss with your CPA or read this article from the IRS.

A refresher on capital gains and losses

This time of year, most of us are thinking about taxes.  But with Congress frequently changing the tax law, it’s not always easy to remember how specific rules are applied.  Fortunately, the IRS has published a recent list of tax tips relating to capital gains and losses to help remind us of some of those rules.  You can check out the list here.

It’s a great refresher for all of us!

Traditional vs Roth 401(k)

Do you have the Roth 401(k) option available to you?  If so, it may be worth looking into.  The following table compares the features of a Roth 401(k) to those of a traditional 401(k).

Traditional 401(k)Roth 401(k)
Annual contribution limit$16,500 ($22,000 for participants age 50 and above)$16,500 ($22,000 for participants age 50 and above)
Matching contributionsAllowed. May be combined with employee contributionsDeposited separately in a Traditional 401(k) account. Taxed when withdrawn
Tax status – employee contributionsMade with pre-tax dollars; deductible from current incomeMade with after-tax dollars; not deductible from current income
Tax status – withdrawals after age 59½ Taxable as ordinary incomeNot taxable
Mandatory withdrawalsRequired minimum distributions start at age 70½ Required minimum distributions start at age 70½
Best for


Employees who need the current tax deduction, who will make withdrawals within five years, or who will be in same or lower tax bracket in retirementEmployees who do not need the current tax deduction, who will not make withdrawals for five years or more, or who will be in higher tax bracket in retirement
ConcernsAll growth in the account, including capital gains on equity investments that would qualify for favorable capital-gains treatment if earned outside a retirement account, are taxed at ordinary income ratesIf tax rates decline, early payment of taxes will have been counter-productive; requires giving up more current income to maximize employer match

Investing around mutual fund distributions

I have liquid assets that I want to invest in Vanguard Funds using your diversification strategy. Many of the funds pay out dividends at the end of December. My money is sitting in the bank right now. Is it better to wait until January to invest after the dividends are paid, or is now far enough ahead that the dividends won’t create a penalty?


If your time frame is from now to the end of the year, there is no way to know now whether you should invest at all. If markets go down between now and December 31, you are better off with money in the bank. If markets go up, you are better off investing.

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