Nine year-end strategies well-worth your time and energy
With the year’s end fast approaching, there’s still time to minimize your tax bill for 2010 and build a strong financial base for 2011. There are three primary ways to reduce your tax bill with just three weeks remaining – investing in yourself, your retirement or your home. Go back to school for a higher education credit of 20% of the cost of attendance up to $2,000, contribute to an IRA or increase 401(k) contributions, and take advantage of up to $1,500 of home energy efficiency upgrades. Here are nine strategies to help guide you through the sometimes-confusing ins and outs of year-end tax planning.
Tax savings strategies for 2010:
1. Estimate your income and deductions.
Comparing this year’s likely income against projected 2011 earnings is the key to making wise decisions at tax time. If it looks like you’ll make more in 2010 than in 2011, you may find that you’re ineligible for important credits and deductions this year. Hence, the wisest course may be to defer as much income as possible into 2011 or postpone incurring certain expenses until next year. If you expect to make more in 2011 than in 2010, you may want to bunch deductions next year in order to minimize the taxes you’ll owe in 2011.
2. Maximize contributions to company-sponsored plans
This is a great place for a tax break. If you have not contributed the maximum to your 401(k), find out if you can increase your contributions for the year. Your contributions are made pre-tax, which reduces your adjusted gross income and overall tax bill. Employer matching can mean even more money in your retirement plan.
3. Save on education
The fate of tax treatment for educational expenses is up in the air as Congress debates tax law changes. As it stands currently, you could get a credit up to $2,500 based on your eligibility for higher education in 2010 if you pay for tuition for spring semester now. If you, your spouse or your dependents have a college tuition bill for the spring 2011 semester, you might benefit from paying the spring semester tuition before the end of 2010. The education credits are subject to income limits. No American Opportunity credit \ may be taken once your modified adjusted gross income reaches $180,000 for married taxpayers filing a joint return and no Lifetime Learning Credit may be taken once your modified adjusted gross income reaches $120,000. The credits are reduced with modified adjusted gross income exceeds $160,000 or $100,000, respectively. If you expect a raise in 2011 that will bring your income into or over the phaseout range, pay the tuition now.
4. Determine your Alternative Minimum Tax (AMT)
Completing a year-end tax projection can help you determine if you’ll be subject to the AMT. Some itemized deductions are not allowed under the AMT which can result in a higher tax bill. Tactics to minimize the impact of AMT include: deferring capital gains (when appropriate), considering the timing risks associated with exercising incentive stock options and minimizing unreimbursed business expenses.
More from GFC, Below
5. Consider your IRA
If you’re eligible to deduct your IRA contributions, you can make traditional IRA contributions to decrease your 2010 income. And, you can contribute right up until April 18, 2011, to impact your 2010 return.
6. Look at your withholding
Now is the time to ensure that you have enough tax withheld or have paid enough estimated tax to meet your projected obligations and to avoid a penalty for underpayment.
7. “Green” your home
Energy-efficiency improvements to your home get a tax credit rate of 30% of the cost of all qualifying improvements, with a maximum credit limit to $1,500 claimed for 2009 and 2010 combined. This includes home improvements such as adding insulation, energy-efficient exterior windows and doors, energy efficient heating and air conditioning systems, and certain metal and asphalt roofs.
8. Make a hybrid purchase
You can drive away with a tax credit if you buy a qualifying gasoline/electric hybrid or qualifying clean diesel vehicle in 2010. The size of the credit depends on how fuel-stingy your new car is, but the tax savings can range from several hundred to $2,350.
9. Examine your portfolio
If you have a large net capital gain in 2010, you might want to consider reducing your tax liability by selling some stock that will generate a loss before year-end.
This article was contributed by the Tax Pros at H&R Block. H & R Block is not affiliated with LPL Financial. Please consult a tax professional for your own situation. This information is not intended to be a substitute for specific individualized tax advice.
You may also be interested in reading, IRS Tax Audits Know No Season