Year-End Tax Planning and Financial Planning Ideas - Dec. 2011

Private Wealth Management Products & Services

Year-End Tax and Financial Planning Ideas

Late in 2010, Congress passed an extension of a wide variety of expiring tax laws, and as a result created
some temporary stability when it comes to tax planning. However, as taxpayers wind down 2011 and
head into 2012, this short-term certainty will soon be replaced with significant questions regarding the
future of the country’s tax system.
In December 2010, President Obama and Congress agreed to a two-year extension of what has been
called the Bush tax cuts – lower overall tax rates for all taxpayers, preferable rates for dividends and capital
gains, no phaseouts of deductions or exemptions, etc. Also included in that agreement was a substantial
reduction in the estate tax in the form of a larger exemption and lower marginal tax rate. All of those
changes will apply through 2012. Come 2013, however, those changes are scheduled to expire. When you
couple that with many of the tax aspects of the 2010 health care act taking effect in 2013, assuming
challenges to the constitutionality of the law aren’t successful, and the uncertainty of a Presidential
election, taxpayers face a very uncertain tax future.
When it comes to 2011 and 2012, it is likely the tax code will remain relatively stable. As with any year,
there are some strategies that are scheduled to become obsolete next year, but there are also many
planning ideas that are time-tested and should be considered by all taxpayers. The below list of year-end
tax and financial planning strategies is a starting point for you to discuss with your Baird Financial Advisor
and your tax consultant. While your investment decisions shouldn’t be driven entirely by tax issues, there
are instances where you can make sound investment decisions that will decrease your tax liability. As in
any year, it’s possible law changes could yet happen that would apply to 2011 or 2012 that would change
the approaches listed below, so it’s important to follow how things proceed in Washington.

Investment Planning

• Review your net long-term and short-term gains and losses. There may be an opportunity to sell a losing
stock and offset gains from other sales. Since short-term gains (assets held one year or less) are taxed at
your ordinary income tax rate, it’s important to plan to offset those first, which may require realizing only
short-term losses.
• On the other hand, you may look at realizing gains before year-end to absorb any losses realized earlier in
the year. Capital losses are used first to offset capital gains. Short-term losses first offset short-term gains,
and long-term losses first offset long-term gains. If you have net losses in one category, those losses can
offset net gains in the other category. If total losses exceed total gains, up to $3,000 of the remaining losses
can be used to offset other income. Losses in excess of this are carried over to the next year to offset gains
in that year. These excess losses can be carried forward indefinitely.

©2011 Robert W. Baird & Co. Incorporated. Member NYSE & SIPC.
Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. 1-800-RW-BAIRD. www.rwbaird.com
First Use: 11/2011.

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Year-End Tax & Financial Planning Ideas, continued.
o However, don’t feel that you must recognize gains in order to “use up” losses you realized
during the year. Those losses can be carried forward to the next year, when you may have a
gain that is appropriate to realize from an investment standpoint. You wouldn’t want to have
to pay tax on a gain next year because you felt the need to “use up” losses this year. Make sure
any transaction makes sense from an investment standpoint first, and a tax standpoint second.
• Prior to 2008, taxpayers in the 15% or lower ordinary tax bracket paid only 5% on their long-term gain, as
opposed to 15% for those in higher tax brackets. For 2008 through 2012, however, the 5% rate for those
lower-income taxpayers dropped to 0%. While that doesn’t mean low income taxpayers can have an
unlimited amount of gains that are tax-free, it does provide a planning opportunity for those taxpayers. If
you find yourself in the lower ordinary tax brackets for 2011, consider realizing some tax-free gains this
year, but be sure to work with a qualified tax advisor as there are rules limiting the overall benefit.
• Make sure you will have enough interest income and short-term gains to be able to deduct any margin
interest paid during the year. Margin interest is deductible only against these types of investment income,
although excess interest expense may be carried over to offset future investment earnings.
o When dividend income began being taxed the same as long-term capital gains, it no longer
qualified as investment income for purposes of this deduction. Taxpayers do have the option
of foregoing the lower tax rates on dividends and long-term gains in order to treat those items
as investment income for purposes of this deduction. Those considering this election should
consult with a tax advisor who can prepare projections under both scenarios.
• Beware of the wash sale rules as you divest of losing stocks. These rules prevent you from deducting a
capital loss from the sale of a security if you buy a “substantially identical” position within a 61-day period,
beginning 30 days before the day of sale and continuing for 30 days after the day of sale. The wash sale
rules don’t apply to any sales for a gain. This wash sale rule is especially important to remember during up
and down markets like we’ve seen the last few years. You want to make sure you get the full tax benefit of
any realized losses when available.
o During 2008, the IRS clarified that selling a security for a loss in a taxable account and then
repurchasing it in an IRA can qualify as a wash sale. This had been unclear until the IRS
announcement. Therefore, be sure to look across your entire portfolio when determining if
the wash sale rules will apply to you.
• In order to claim a loss for a “worthless stock”, you must be able to prove the stock had value at the end of
2010 but did not at the end of 2011. If you are unsure you can prove that the stock is truly worthless by
the end of the year, you will need to sell the stock for whatever value you can in order to deduct a loss. In
general, if the stock is still trading shares, it is not considered worthless. A bankruptcy filing by the
company does not, on its own, indicate the stock is worthless.

Income Taxes

• Review your federal withholding and estimated income tax payments to make sure you will not be subject
to underpayment penalties. To avoid a penalty for 2011, your total payments must equal the lesser of (1)

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90% of your current year tax liability or (2) 100% of last year’s liability (110% if your adjusted gross income
(AGI) was more than $150,000 for 2010).
• While the 2012 tax rates are expected to stay the same as the 2011 rates, you may find that adjustments to
your income in 2012 will cause you to move into a higher tax bracket. If that’s true, you may find that
accelerating income into 2011 from 2012 will be appropriate. While it’s difficult for most taxpayers to time
the recognition of income, self-employed individuals or those whose income is primarily commission-based
may have more flexibility here.
• Determine if it is better to pay deductible expenses (such as property taxes, charitable contributions, state
estimated tax payments, etc.) before the end of 2011 or after. Factors to consider would include a potential
change in tax rates between 2011 and 2012 or whether you may be subject to AMT in either year.
• Be sure to complete any charitable obligations prior to year-end in order to take a tax deduction for 2011.
As always, utilizing appreciated property for your contributions rather than cash can be a great tax savings
tool.
o When making charitable gifts, be sure not to gift securities that have a loss. If you gift a
position with a loss, your deduction is limited to the market value at the time of the gift, and
neither you nor the charity will receive any tax benefit for the built-in loss. If you want to gift
something that has a loss, you are better off selling it first to realize the loss, which you can
then deduct, and then gifting the sale proceeds to the charity.
o Also be sure to donate only those items that would be considered “long-term” assets.
Donating an asset that is considered a “short-term” holding will limit your tax deduction to
your cost basis in the asset.
• The law that allows eligible taxpayers to make donations directly from their IRA and not have to report the
withdrawal was extended late in 2010, but is now scheduled to expire again after 2011. If you are over age
70½ and have charitable obligations, consider the benefit of using IRA assets to make those gifts. This is
especially true if you subject to the Required Minimum Distribution rules, but don’t need the entire amount
of the distribution.
• Consider bunching certain itemized deductions such as medical expenses and miscellaneous deductions in
order to exceed the minimum AGI limitations. However, beware of AMT considerations that can reduce
or eliminate any benefit from this planning.
• Consider restructuring nondeductible interest expense (such as auto loans or credit card debt) to deductible
interest (such as a home equity loan).
• The deduction for several different expenses are scheduled to expire after 2011, so consider accelerating
the following expenses from 2012 into 2011 if you are eligible for the deduction. These expenses include:
o Qualified tuition and related expenses
o The $250 deduction for teachers for qualified classroom expenses
o State and local sales taxes for those who don’t deduct their state income taxes
o Mortgage insurance paid on a qualified personal residence mortgage (subject to phaseout for
married taxpayers with AGI over $100,000)

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• If you have employer stock options, review your long-term strategy to determine whether you should
exercise any options this year. This is particularly true if you hold Incentive Stock Options (ISOs). While
these options only create income for Alternative Minimum Tax purposes, AMT is becoming a concern for
more and more taxpayers each year.
o The AMT patch was renewed for 2011, as has been done for the last few years. However, it is
scheduled to expire again after 2011. Without this patch, millions more taxpayers will be
subject to the AMT, meaning an ISO exercise could result in an unforeseen tax liability.
Because of this pending expiration, many taxpayers who are able to avoid AMT in 2011 may
not be able to do so in 2012. As a result, accelerating ISO exercises into 2011 may be
appropriate.
• The Kiddie Tax expanded in 2008 to children under age 19, or under age 24 if they are a full-time student.
Parents should keep this tax in mind as they structure gifting and investment strategies for 2011 and
beyond.

Retirement Planning

• Make sure you have made the maximum 401(k) or other retirement plan contribution for which you are
eligible.
• Review contributing to your Traditional Individual Retirement Account (IRA) or Roth IRA. Contributions
to these accounts are limited to a combined $5,000 ($6,000 if age 50 or over).
o With a Traditional IRA, income limits affect deductibility if you’re covered by an employer–
sponsored plan. For 2011, married couples with income over $90,000 and singles over $56,000
will begin to lose the benefit of the IRA deduction. However, being over that threshold does
not prevent you from making a non-deductible contribution (as long as you have earned
income equal or greater to the contribution amount).
o With a Roth IRA, you can contribute only if your AGI is no more than $167,000 for joint
taxpayers ($105,000 for single taxpayers), with contributions phased out at $177,000 ($120,000
single).
• Consider converting your Traditional IRA to a Roth IRA prior to year-end. Remember that in 2010, the
AGI limit for Roth conversions was permanently eliminated. While all taxpayers are now eligible to do a
conversion, it will be fully taxable in the year of conversion.
o Remember that for conversions done in 2010, the income from the conversion could be spread
over 2011 and 2012. Don’t forget any 2011 income you may have to recognize as a result of a
2010 conversion.
• If you did convert a Traditional IRA to a Roth IRA, you may have seen the value of the account decrease
since the time of the conversion. If that’s the case, you may want to consider reconverting that Roth back
to a Traditional IRA, thereby negating the tax due on that formerly larger account balance. If you did a
conversion during 2010, the deadline to recharacterize the Roth conversion was October 17, 2011.
However, conversions done in 2011 may be recharacterized until October 15, 2012.

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o If you do reconvert back to a Traditional IRA, you can then convert it again to a Roth IRA,
subject to waiting periods. You must wait until the next taxable year after the original
conversion to the Roth, or 30 days, whichever is longer. This means that if you reconverted a
2010 Roth conversion during 2011, you can then reconvert it back to a Roth during 2011, as
long as you wait 30 days. If the original conversion was in 2011 and you reconvert it this year,
then you must wait until at least January 1, 2012 to reconvert back to a Roth.
• The Required Minimum Distribution rules were waived for 2009, but were reinstated for 2010 and beyond.
If you turned 70½ during 2011, your first RMD is due by April 1, 2012. Otherwise, your RMD is due by
December 31, 2011. Missing that deadline for taking any RMD will result in a penalty equal to 50% of the
undistributed amount.

Other Financial Planning Considerations

• Take advantage of the annual $13,000 gift tax exclusion by making gifts to family members.
• Establish an Education IRA to provide tax-free income for education. You can contribute up to $2,000
per year per beneficiary under 18 years old.
o Upon the expiration of the Bush tax cuts, the maximum contribution to an Education IRA is
scheduled to shrink to $500 in 2013. In addition, the deadline for contributions will move up
to December 31 rather than April 15 of the next year.
• You may also consider funding a 529 plan for future education expenses. Annual limits vary by plan.

Staying Up-To-Date

This may be a good time to address other financial items that don’t necessarily relate to year-end.
• Review your investment asset allocation with your Baird Financial Advisor to determine if it is still
appropriate given your goals and time horizon.
• Compile a list of where all your pertinent financial documents can be found in the event you become
incapacitated. Include account numbers, contact names and phone numbers, and other key facts on you,
your family and your assets. This sheet should be kept in a safe location, but accessible by the appropriate
person if the need arises.
• Make sure your estate documents are still appropriate, especially if you’ve had any change in your marital
status, any births or deaths in the family, a significant change in your personal net worth, or moved to a
new state during the year.
• Review any beneficiary designations on insurance policies, retirement plans, etc. to ensure they are still
appropriate.

For more information, please contact your Baird Financial Advisor.

Robert W. Baird & Co. does not provide legal or tax advice. We are prepared to work with your current tax and legal advisors and are willing
to make referrals for services Baird may not offer

First Use: 11/2011.

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Year-End Tax Planning and Financial Planning Ideas - Dec. 2011

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