Tips for Saving on Taxes

 

1)      Top off Retirement Accounts – Taxpayers can boost their retirement savings in a tax-efficient manner by contributing up to $5000 to an IRA or Roth IRA if they are under 50 and $6,000 if they are 50 or older.

2)      Claim the Saver’s Credit – Lower-income taxpayers should remember to take the Saver’s Credit for contributions they made to an employer-sponsored retirement plan such as a 401(k) or IRA/Roth IRA.  Taxpayers get a credit for up to half of what they contribute, although the maximum credit is $1,000 or $2000 for couples.

3)      Convert a Traditional IRA to a Roth IRA – Taxpayers who convert and IRA to a Roth IRA in 2010 do not have to pay the tax due on the conversion in 2010.  They can decide in 2011 if they want to defer 50% of the income to 2011 and 50% to 2012.  While taxpayers can delay the payment decision as late as October 15, 2011, they have to pay the tax when their taxes are due in April 2011.

4)      Contribute to Charities Tax Free – The new law allows taxpayers who are 70 ½ or older to make contributions to charitable organizations directly from IRAs without paying tax on the amount contributed from the IRA.  Taxpayers can make these contributions during January of 2011 and have them apply to their 2010 taxes.  Each taxpayer can contribute up to $100,000 for 2010 and 2011.  Contributions for 2010 can be made until April 18, 2011.

5)      Offset Education Costs – Amount the tax rules that taxpayers can use to offset 2010 education costs are the following:

  • The American Opportunity Credit offers eligible taxpayers up to $2,500 per student for qualifying 2010 tuition and expenses, including books and computer equipment.  The American Opportunity Credit can be used by students for the first four years of post-secondary education expenses.  Importantly, taxpayers who pay no taxes may qualify for a refund of up to $1000.  The new tax law extends the American Opportunity Credit through 2012.
  • An “above-the-line” deduction offers eligible taxpayers as much as $2,500 for interest paid on student loans, even if they don’t itemize deductions.  The new tax law extends this deduction and increases the phase-out range.
  • Section 529 college savings plans give parents, grandparents and others a way to contribute after-tax dollars in order to have earnings and interest accumulate free of federal and in some cases, state taxes.  No federal income taxes are paid on withdrawals from the accounts.

 

6)      Take Tax Credits for Energy-Efficient Home Improvements – Homeowner’s who installed certain energy-efficient heating and air conditioning systems; water heaters, doors and windows, insulation and roofs are eligible to receive a credit to help reduce the costs.  Taxpayers who did not take advantage of the credit in 2010 have an opportunity to do so in 2011, under the new tax law.  A credit is available for homeowners who invest in green energy equipment, too.  Such equipment includes solar electric systems, solar hot water heaters, geothermal heat pumps and wind turbines.

7)      Consider Deducting State and Local Sales Taxes – Taxpayers can choose to take an itemized deduction for state and local general sales taxes on their 2010 taxes instead of the itemized deduction for state and local income taxes.  Taking a deduction for sales taxes can mean a lower tax bill for taxpayers who make such a major purchase as a motor vehicle during the year or who live in states that do not have an income tax.  The new tax law extends this option through 2011.

8)      Choose Better Estate Tax Method – Taxpayers, who inherited property in 2010 when no estate tax applies, get nine months under the new tax law to choose whether to use the new estate tax rules (35 percent top rate and $5 million exemption) or no estate tax with the estate’s assets generally being subject to the carryover basis rules.  Carryover basis rules result in transfer of the decedent’s adjusted basis (typically, the owner’s original purchase price) to the beneficiaries.  Historically, the basis of an estate’s assets have been established using stepped-up basis rules, which consider basis to be the fair market value of the assets at the time of the owner’s death.

9)      Defer Compensation – Since tax rates will remain at current levels for the next two years, taxpayers may want to consider deferring payments into 2011 from such compensation sources as pensions, retirement plans and stock options.

Enhanced by Zemanta