Taking Care Of Business

As you get ready to ring in the New Year, you may want to wring what you can out of the Old—in the form of tax breaks.

Barb Wollan, area family finance program specialist with the Iowa State University (ISU) Extension office in Hamilton County, says you may want to know how much you made before you decide how much to give in the form of year-end charitable contributions.  “Sometimes there are certain kinds of expenses where you need to have more than, say, 2% of your income before it counts as a deductible expense; people will want to collect it in one year or the other,” she says.

For older givers, the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act carried some changes.  The ability of IRA owners who are at least 70 ½ years of age to make direct qualified charitable distributions from their IRAs had expired at the end of 2009; Congress retroactively reinstated that provision in the 2010 law.  It expires on December 31, 2011, so this may be your last chance to take advantage of it.  Qualified charitable contributions can be used to satisfy the minimum distribution requirement, so the IRA owner who does not need the required minimum distribution for income can direct it to the charity of his or her choice without having to recognize it as part of Adjusted Gross Income.

Giving from an IRA rather than other assets may be especially appropriate if you do not itemize deductions, you already plan to will money from the IRA to the charity, or you would not be able to deduct all of your charitable contributions.  The gifts must be made directly from your IRA to a public charity, not a private foundation, a supporting organization or a donor advised fund; and, they cannot be used to establish an annuity or trust and must be donated outright.

As you approach the holidays, Wollan also offers this word of advice: “Don’t overspend.”

A circular from University of Illinois Extension offers these tips on controlling your spending during the Giving Season: First, write out a plan for spending on gifts and holiday activities; think about what fits into your budget.  Set a limit on how much you'll spend on gifts for each person.  Do some early bargain hunting; you may want to make the first trip without your money and credit cards, and come back when you've made some purchase decisions.  If it's been a tough year, discuss with friends and family whether it would be best to draw names for gifts, set dollar limits, or just eschew gift giving entirely.  You can also offer handmade gifts, or a certificate pledging your services in lieu of a hard commodity—worth, say, one free house cleaning!

If you decide to spend cash on gifts, leave your credit cards at home.  If you write checks, enter the amount and new balance into the ledger with each purchase, rather than totaling them all up at the end of the day.  Similarly, if you do use credit cards, set a limit, write it down, carry the sheet with you and subtract each purchase on the spot.

Once you've survived the holidays, Wollan says it's time for a New Year’s financial checkup, which includes, “Doing your net worth statements and checking your various measures in terms of short-term financial security, as well as your long-term retirement plans.  Have you done a home inventory, or updated photographs or a video record for a home inventory?  Have you got your files in order, so people could find things if you weren’t there to find them?”

State Farm Insurance recommends property owners maintain a checklist, broken down either by each room in the house or the type of property.  Their website says, “An accurate inventory and proof of ownership at the time of a loss can make claim settlement easier and faster. The inventory will take time to compile, but the time and frustration it may save you later will more than make up for it.”

Another thing to think about before the sands runs out on 2011 is a tax-deductible contribution to your retirement account.  The Internal Revenue Service notes there have been changes in 2011 in the combined traditional and Roth IRA contribution limits.  If you are under 50 years of age at the end of 2011, the maximum contribution is the smaller of $5,000 or the amount of your taxable compensation for 2011. The limit can be split between a traditional IRA and a Roth IRA but the combined limit is $5,000, and the maximum contribution to either the traditional or Roth IRA may be reduced depending on your modified adjusted gross income.  If you are 50 years of age or older before the end of 2011, the limit goes to $6,000.

If you are running an enterprise on your acreage, the end of the year is also a good time to conduct inventory and, if your business tax year is the same as the calendar year, to cluster your business expenses.  Wollan says, “When we’re itemizing deductions on Schedule A, miscellaneous expenses are only deductible to the extent they exceed 2% of our income, for people who are employed but have unreimbursed business expense on Form 2106—that’s the sort of thing you want to do is to make sure you’re clustered, to get your deductions in one year and not in the next.”

In addition, she recommends you start 2012 by “reviewing your will, reviewing your property ownership—all your estate plan kinds of issues; along with that, reviewing your beneficiaries of various financial accounts as well as a life insurance policy.  Likewise, checking your credit reports - we want to remind people to check all three of their credit reports from all three credit bureaus once a year.  Or if they’re organized enough, they can mark their calendar and check one each four months.”

Wollan believes the tough economic times have people paying more attention to their finances.  “I think that’s one of the silver linings of this down economy is that people have become more aware of the importance of financial security in various ways,” she says.  “People who have never before worried about having an emergency fund may now be starting to build one up if they have the income to do it.  People are paying down credit—we know that.  So we know that at least some folks are learning from our current situation, and making good use of that learning and taking better control of their spending.”