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Tax season is over (phew). Now what?

Tax season is over, are you prepared for next year — and beyond?

I know, the last thing you want to think about now is taxes. Taxes, taxes, taxes, it’s really tiresome. But the truth is that tax planning in advance can save you more than any last-minute maneuvers. And some people are already beginning to think ahead to the uncertainty of tax rates after 2012.

After all, the rules put in place by last year’s tax deal last for two years only, and if there’s one thing that’s clear it’s that there will be another battle over taxes soon.

If you’re the type who wants to plan — or who would benefit by it — the thing to think about is that the window in place through year-end 2012 raises precisely the same issues as the one that was slated to shut at the end of 2010. “All of the same topics come into play again. There’s a limited timeframe to take action, and the complexity and uncertainty is going to create some inertia,” says Greg Singer, director of research at Bernstein Global Wealth Management. “There’s not a lot of opportunity cost to acting now. It’s hard to build a case where families are worse off for taking action now rather than waiting.”

That means, if you’re wealthy (especially if you make above $250,000, that amount that has defined you as such for tax discussions) then you’ll want to think about planning for higher income-tax rates. As the tax law is written now, come 2013 the top rate for capital gains will rise from 15 percent to 23.8 percent (including the 3.8 percent healthcare surcharge), while the top marginal income tax rate will increase from 35 percent to 43.4 percent (again, including the healthcare surcharge).

If you’re not so well-heeled, for the most part the tax debates — and strategies for playing potentially higher taxes — have never been about you. Here’s a few things to think about in the coming months:

If you expect your tax rate will be going up. If that’s the case, then you’ve got a window between now and the end of 2012 to plan. The planning is the same as what you were doing (or should have been doing) last year: convert your IRA to a Roth while tax rates are low; accelerate income and put off deductions; take capital gains to the extent your portfolio strategy will be helped by it, and stockpile capital losses as their ability to offset gains becomes more valuable when the rates on those gains are higher. Roth IRA conversions are valuable for many people, as we’ve written about before; if that’s the case for you, it’s worth doing it sooner rather than later.“It’s hard to imagine that they’re going to lower taxes, so Roth conversions are a great idea,” says Jim Lange, an investment advisor and author of the book The Roth Revolution.

Six ways to cut your tax bill now

Tax deadline day, April 18, is quickly approaching.

Before you file, make sure you’re grabbing all of the deductions due to you. Robert Spielman, a certified public accountant and partner in the tax and business services practice at Marcum LLP, sat down with Prism Money and shared several ways to navigate the muddy waters of tax season. Here is his advice.

What are the best ways to reduce taxable income?

Use all the credits you can. This one is a no-brainer. There are a million credits for individuals and not everyone knows about them.  There’s the new home buyer credit and the energy credit for installing new windows, energy efficient appliances, solar energy or anything like that. There’s one set of college credits.

What advice do you have for Roth conversions?

In 2010, you convert your otherwise taxable IRA account into a Roth IRA account and pay all the tax equally in 2011 and 2012. If  you want to change your mind, you have to do that before October 17, 2011. If, for whatever reason, you don’t want to take money from the Roth and you don’t want to pay the tax, you could convert the account back into a regular IRA account. That’s not to diminish the great idea of doing a Roth conversion, but one of the reasons that you might convert back is the account went down in value and you want to do it again in 2012.

Taxes: 7 tips for last-minute filers

Nearly one-third of Americans will file their taxes in the two weeks leading up to this year’s April 18 deadline. Are you one of the last-minute filers? Here are some tips from Bob Scharin, senior tax analyst at Thomson Reuters, to help make this year’s personal tax return preparation more manageable and avoid mistakes.

Two sides to the first-time homebuyer credit

If you purchased your first home in the earlier months of 2010, you may be entitled to a tax credit of up to $8,000. This credit and the eligibility requirements have received a lot of positive attention, but less publicized is an important aspect of an earlier incarnation of the credit. If you claimed a first-time homebuyer’s credit on your 2008 tax return, you have to pay extra tax now.

The credit in 2008 was really nothing more than an interest-free loan that generally must be paid back over 15 years, beginning with the 2010 return. This means a $500 repayment with your 2010 return if you claimed the maximum 2008 credit of $7,500.

Energy-efficient property credit

Purchases of energy-efficient windows, doors, or insulation for your primary home can qualify you for a 30 percent tax credit of up to $1,500. But if you made the purchases in both 2009 and 2010, you may see red when you calculate your 2010 credit for being green. The $1,500 ceiling on the credit is an aggregate for 2009 and 2010, so if you claimed the maximum credit on your 2009 return, you cannot claim an additional credit for 2010.

Roth IRA conversion offers tax timing choice

Roth IRA conversions: Switch now to avoid higher taxes

If you’ve been thinking of converting some of your retirement assets to a Roth IRA, rising tax rates are just one more reason to do it sooner rather than waiting till next year.

With a traditional IRA you pay taxes when you withdraw money, but with a Roth you pay those taxes when the money goes in. For those who think taxes will go up, and especially for those who expect to have substantial assets to pass on to the next generation, a Roth is a nice planning tool. That’s why when Roth conversions were opened up to those with modified adjusted gross income greater than $100,000 in 2010, financial planners and private wealth advisers urged many of their clients to make the switch.

For those who’ve been loath to go Roth — after all, who wants to pay taxes in advance? — the possibility of higher tax rates in 2011, especially for high-income taxpayers, provides a new impetus to convert before year end. “Do it now instead of waiting,” says Craig Richards, director of tax services at Fiduciary Trust. “Tax rates are not going to be any cheaper on the conversion than they are now.”

There are some general rules to keep in mind — and some situations in which you won’t want to convert to a Roth. If you need to tap your tax-deferred retirement savings to pay the tax bill, don’t do it. Ditto, if you think your own income tax rate will go down a lot, perhaps because you are a high net-worth New York City resident who plans to move to Florida next year to retire.

Who benefits the most from a Roth conversion? People who have substantial retirement assets that they do not need to touch for awhile, if at all. “It is not necessarily the age of the investor that is important, but the time frame in which the money is likely to be consumed,” says Patrick Boyle, a director at Bernstein Global Wealth Management.

A 50-year-old who plans to burn through his retirement assets at age 60 has a relatively short time horizon, while a 70-year-old who doesn’t need her assets and plans to pass them on to a younger beneficiary could have a much longer one.

The really big payoffs come to those who leave assets to their kids or grandkids, as the inheritors will never owe income tax on the Roth. For those worried about the estate tax, a Roth conversion is an interesting planning tool since those tax payments lower the value of your future estate (though Roth assets are still included in the estate’s value).

How to conquer the retirement worry gap

Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need.

Pencil in how much money it would take for you to live comfortably for 25 years. Include items that are not covered by insurance – deductibles, travel, home maintenance, taxes. Then project how much Social Security and retirement income you will have by the age in which you cast that not-so-longing last glance at your office door.

The difference between your comfort zone amount and your retirement kitty is the worry gap. That’s the amount you need to make up by working longer, saving aggressively or downsizing your lifestyle.

For millions, the worry gap is a pretty deep crevasse. It’s hard to fill it up with money when your 401(k) is underfunded and the bills keep arriving. In a job-losing, no-raise economy, it looks like a bottomless pit.

A recent survey – one that I always take note of – showed that some two-thirds of those polled in the two lowest pre-retirement income levels will be running short only 10 years into retirement. These folks, as monitored by the annual Employee Benefit Research Institute’s Retirement Readiness study are saving the least for retirement.

Yet even those in the highest-income groups are still going to be facing problems paying for basic expenses and uninsured medical bills. Remember that Medicare has co-pays for hospital and medical services and is in severe fiscal trouble.

The EBRI study also broke down who was most at risk. “Early” boomers (those aged 56-62) had a 47 percent chance of running out of retirement funds. Their younger peers (ages 46-55) and “Generation Xers” (ages 36-45) are about 44 percent at risk.