Your Year-End Personal Finance Checklist

6. Plan Year-End Giving

You can give $12,000 each to as many people as you'd like this year without triggering gift tax. But that gift doesn't have to be cash. In fact, lots of people who have appreciated stocks in their portfolio give those instead.

The cost basis of the asset carries over to the person receiving the asset. If the person receiving the gift is in a lower tax bracket, he or she may pay less in capital gains tax when they sell the asset.

• Identify to whom you want to give:
You can give as much as $12,000 each to any person without paying gift tax
You can give an unlimited amount to charity and get a deduction

• Review your taxable investment accounts to identify appreciated assets you want to give away.
• If you're older than age 70 1/2, consider making a gift directly from your IRA to avoid taxable income.

7. Take Required Minimum Distributions

If you're older than age 70 1/2, you probably have to take at least the minimum required by Uncle Sam from your 401(k) (unless you're still working for that company) or traditional IRA.

Don't wait until the last minute. If you blow it, you'll owe 50% of the amount you should have taken plus ordinary income tax. I've seen lots of people cut it way too close at year-end.

Here's what you'll need:

• Get the balance of your traditional IRA or company retirement plan as of Dec. 31, 2006. __ Divide that by the IRS factor based on your age (click here for the factors for most of you).
• Take your distribution from one or more of your IRAs. Distributions from company plans, like 401(k)s, must come from that account.

8. Do a Year-End Tax Projection

I don't know about you, but I hate nasty little tax surprises. I like to know what to expect long before I'm filling out my yearly tax forms. Doing tax projections throughout the year can help you gain the upper hand so that you have some control over what happens next April.

Not everyone will need to do this, but if you have to pay alternative minimum tax, exercise stock options, or have income from multiple sources, a tax projection at this time of year can be extremely helpful.

You can have your accountant do the projection or you can do it yourself with tax-preparation software. Your projection can show you where you stand with year-to-date realized capital gains and losses from investment sales.

• Gather pay stubs to project 2007 income.
• Look at your 2006 1040 tax return to see if there are numbers that need to be carried forward (like capital losses)
• Build in stock-option strategies, realized capital gains or losses, or year-end charitable giving.
• Determine if you need to adjust your withholding.
• Have your accountant review the projection for other 2007 action steps.

9. Consider a Roth Conversion

• Do you meet the criteria? If you have adjusted gross income of less than $100,000 and you have a traditional IRA, you may want to think about converting to a Roth IRA.

You don't have to convert the whole thing--you can just use a portion. When you convert, you trigger ordinary income tax because you'll be paying tax on the portion of the traditional IRA that you convert.

Take a look at the top of your tax bracket. You can convert just enough of your IRA so that you don't push yourself into the next tax bracket.

• Consider whether a Roth IRA makes sense for your situation. What's so great about a Roth IRA? For one thing, you are diversifying by tax effect (you hold a variety of assets that are taxed differently). Whereas you'll pay taxes on your 401(k) investments once you begin tapping your assets, Roth IRA distributions are not taxed once you have held them for five years and are older than age 59 1/2. (Your contributions can always be taken out tax-free.) And you aren't required to take RMDs.

That said, Roth IRAs are not for everyone. For starters, you do have to pay taxes sooner (you contribute aftertax dollars) rather than later. Further, there is an element of tax risk involved with Roth IRAs--for example, you could decide to convert now based on current tax laws only to discover five years from now that the tax laws change, thereby making your conversion less beneficial. If your AGI is more than $100,000, you're ineligible to convert. Finally, if you are younger than age 59 1/2, you must pay the tax for a conversion with assets outside of your IRA or you'll get hit with a 10% penalty on top of income taxes.

• Consider a Roth conversion in 2010. Even if you don't qualify for a Roth IRA conversion now, you will in 2010 and beyond. A recent tax law removes the income limitation then. So, if a Roth IRA appeals to you, you can always make nondeductible contributions until 2010 and convert then.

10. Plan Year-End Stock-Option Transactions

If you have stock options, you need to do some homework before year-end. Stock-option planning can be really complicated. In addition to gauging the tax consequences, you also have to dodge company blackout periods (when no one can sell stock). Here's what to do:

Page 1| Page 2

Morningstar Premium Members get access to over 3,900 Stock and Fund Analyst Reports, Analyst Picks, and award-winning portfolio tools. Learn More.