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Well, he was unwilling to sit around; he got out and got to work. Sometimes his rowdy schemes got him in trouble but other times they paid off.
Once he saw a government request in the paper asking for bids to install signage along hundreds of miles of the new highway system. Quite a few crews applied with teams of men ready to go to work. Well, grandpa put a bid in on the project as well and he got the job. He moved my grandmother and the kids to a new state and began work on this tremendous task. My mother remembers moving from state to state growing up and has similar stories of my grandfather seeking opportunities all over the west.
Once again our economy has hit hard times and for many, earnings are in the tank. In the midst of this difficult time, there are opportunities. Now is the time to look for those opportunities and to make big decisions. Here are a few ways to take advantage of a lean year.
Lousy Economy & Low Rates. High levels of income mean high taxes, but if your income is at 0 you get to start at the 10% marginal tax rate and move up through the low rates. Consider this as an opportunity to take some income and give substantially less to Uncle Sam than in normal years.
Convert your IRA to a Roth. When you convert a portion of your IRA to a Roth IRA, you pay ordinary income tax. In a normal year with good income you are already starting at a high tax rate, but in lean years that conversion is taxed starting at that low rate.
Lock in Capital Gains. For folks in the 10% and 15% brackets, capturing long term capital gains are “on the house” this year. As part of EGTRRA (Economic Growth Tax Relief Reconciliation Act) folks in these brackets pay 0% on long term gains. Even for folks in higher tax brackets, unless congress extends tax cuts, we won’t see higher tax rates until next year. 2010 may be your last opportunity to take advantage of the Bush Tax Cuts.
Because the Wash Sales Rule does not apply to gains, these securities can be sold at a gain and re-purchased right away.
Locking in Losses While the Market is Down. If you still have losses in taxable accounts hanging around from one of the bursting bubbles, perhaps you should sell that asset and capture the loss. You can carry losses forward to offset future gains and with capital gains rates expected to rise, that means more savings later on. Assets sold at a loss are subject to the Wash Sales Rule and you will have to wait 30 days to re-purchase these assets or purchase different assets.
Converting IRA assets to a Roth makes more sense while the market is down as well. If you had a portfolio that saw losses of 20% you would save about that much in tax. Taxes on an $80,000 Roth Conversion are less than the tax you would have paid converting a $100,000 account.
Carry-Forwards. We touched on carry-forward losses and offsetting gains, but some folks end up with other types of carry-forwards. For folks who are charitable, gifts to non-profits are limited to 30% or 50% of adjusted gross income. If gifts in a year exceed those amounts, depending on the type of charity, you end up with a charitable carry-forward deduction. Unlike the carry-forward loss which stays with you in perpetuity until you use it, the carry-forward charitable deduction goes away. Usually after 5 years, if you don’t use it you lose it!
If you are in a place where you have a charitable carry-forward deduction, perhaps you can save money on a Roth Conversion, or accelerate income in order to use the deduction. Landowners who have made donations of a conservation easement can also benefit from this type of planning.
Speed up the savings. If you own a business, you can deduct the purchase price of qualifying equipment, usually over the course of its lifetime. With the Section 179 deduction you can deduct the full purchase price of the equipment from your gross income. In the past you could deduct up to $250,000 but Washington recently signed into effect, HR 5297, which allows you to deduct twice that amount, $500,000, in the first year. For business, this is a great deduction and with bargains on equipment, now is the time.
Don’t Stop Believin’. Most folks have not seen a recession like this in their lives. Prices are low, interest rates are low. Prices on businesses, equipment and real estate are finally reasonable. We won’t know the bottom until it is too late, but there is certainly more opportunity in a market like this than there was a few years ago. Seek out those opportunities and work with the professionals you trust to take advantage of them. Gather your CPA, your attorney and your financial planner together to find ways to save money and to take advantage of lean years.