71 Ways to Cut Your 2010 Tax Bill
Here is a wonderful article my lender sent me on
Filing your tax return is a once-a-year event but trimming your tax bill requires year-round attention.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
If you managed to claim every possible tax break that you deserved when you filed your 2009 return this spring, pat yourself on the back. But don’t stop there. Those tax-filing maneuvers are certainly valuable, but you may be able to rack up even bigger savings through thoughtful tax planning all year round. The following ideas could really pay off in the months ahead.
Give yourself a raise. If you got a big tax refund this year, it meant that you’re having too much tax taken out of your paycheck every payday. So far this year, the average refund is nearly $2,900, up about $200 from last year. Filing a new W-4 form with your employer (get one from your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.
Boost your retirement savings. One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute to up to $16,500 to your 401(k) or similar retirement savings plan in 2010 ($22,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income. Haven't started one yet? Read 'Why You Need a 401(k) Right Away.'
Switch to a Roth 401(k). But if you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket.
Fund an IRA. If you don’t have a retirement plan at work, or you want to augment your savings, you can stash money in an IRA. You can contribute up to $5,000 in 2010 ($6,000 if you are 50 or older by the end of the year). Depending on your income and whether you participate in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution. Or, you can choose to forgo the upfront tax break and contribute to a Roth IRA that will allow you to take tax-free withdrawals in retirement.
Go for a health tax break. Be aggressive if your employer offers a medical reimbursement account -- sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money. Use our handy calculator to figure out how much you can save.
Pay child-care bills with pre-tax dollars. After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of educational assistance tax-free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job-related, and even graduate-level courses qualify.
Pay back a 401(k) loan before leaving the job. Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you're younger than 55 in the year you leave your job, hit with a 10% penalty, too.
Tally job-hunting expenses. If you count yourself among the millions of Americans who are unemployed, make sure you keep track of your job-hunting costs. As long as you're looking for a new position in the same line of work (your first job doesn’t qualify), you can deduct job-hunting costs including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income.
Keep track of the cost of moving to a new job. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move ... even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 16.5 cents per mile for a 2010 move, plus parking and tolls.
Save energy, save taxes. This is the last year to cash in on a tax credit for home improvements designed to save energy. One tax credit is worth 30% of the cost of new insulation, doors, windows, high-efficiency furnaces, water heaters and central air conditioners up to a maximum credit of $1,500. The credit applies to both 2009 and 2010, so if you took full advantage of it last year, you don’t get another crack at it. But if you didn’t make any eligible home improvements in 2009, get busy before this opportunity slips away. Don't think you need to do anything? Try taking an energy audit.
Think green. A separate tax credit is available for homeowners who install alternative energy equipment. It equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines, including labor costs. There is no cap on this tax credit. Learn more in our slideshow 8 Ways the Feds Will Pay You to Go Green.
Put away your checkbook. If you plan to make a significant gift to charity in 2010, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit. However, don’t donate stocks or fund shares that lost money. You’d be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.
Time your wedding. If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a 'marriage penalty' that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony. And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple.
Beware of Uncle Sam's interest in your divorce. Watch the tax basis -- that is, the value from which gains or losses will be determined when property is sold -- when working toward an equitable property settlement. One $100,000 asset might be worth a lot more -- or a lot less -- than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.
The stork brings tax savings, too. A child born, or adopted, during the year is a blessed event for your tax return. An added dependency exemption will knock $3,650 off your taxable income, and you'll probably qualify for the $1,000 child credit, too. You don't have to wait until you file your 2010 return to reap the benefit. Add at least one extra withholding allowance to the W-4 form filed with your employer to cut tax withholding from your paycheck. That will immediately increase your take-home pay. Read more about maximizing the savings your little dears represent.
Tally adoption expenses. Thousands of dollars of expenses incurred in connection with adopting a child can be recouped via a tax credit, so it pays to keep careful records. In 2010, the credit can be as high as $12,170. If you adopt a special needs child, you get the maximum credit even if you spend less.
Save for college the tax-smart way. Stashing money in a custodial account can save on taxes. But it can also get you tied up with the expensive 'kiddie tax' rules and gives full control of the cash to your child when he or she turns 18 or 21. Using a state-sponsored 529 college savings plan can make earnings completely tax free and lets you keep control over the money. If one child decides not to go to college, you can switch the account to another child or take it back. See Kiplinger’s recommendations for top 529 plans.
Be aware of new rules for Coverdells. A former boon to parents and grandparents who wanted to use tax-free dollars to pay private-school tuition and other education-related costs for elementary and high-school students is about to get a lot less generous. You can contribute up to $2,000 to a Coverdell Education Savings Account for any beneficiary in 2010, but starting next year, that maximum contribution will be slashed to $500. You don't get a deduction, but money you stash in a Coverdell grows tax-deferred and can be withdrawn tax-free to pay education bills. Beyond tuition and fees, you can use Coverdell money to pay for tutoring, books and supplies, uniforms and transportation. You can buy a computer for the whole family to use and pay for Internet access, too. But you better hurry. Starting in 2011 any earnings you withdraw from a Coverdell that are not used for college expenses will be taxable as ordinary income and subject to a 10% penalty. Consider rolling over the Coverdell money into a 529 savings plan next year. It’s a penalty-free move, as long as the accounts have the same beneficiary.
Use a Roth IRA to save for college. Sure, the 'R' in IRA stands for retirement, but because you can withdraw contributions at any time tax- and penalty-free, the account can serve as a terrific tax-deferred college-savings plan. Say you and your spouse each stash $5,000 in a Roth starting the year a child is born. After 18 years, the dual Roths would hold about $375,000, assuming 8% annual growth. Up to $180,000 -- the total of the contributions -- can be withdrawn tax- and penalty-free and any part of the interest can be withdrawn penalty-free, too, to pay college bills.
Fund a Roth IRA for your child or grandchild. As soon as a child has income from a job -- such as babysitting, a paper route, working retail -- he or she can have an IRA. The child's own money doesn't have to be used to fund the account (fat chance that it would). Instead, a generous parent or grandparent can provide the funds, or perhaps match the child's contributions dollar for dollar. Long-term, tax-free growth can be remarkable.
Use a Roth IRA to save for your first home. A Roth IRA can be a powerful tool when you're saving for your first home. All contributions can come out of a Roth at any time, tax- and penalty-free. And, after the account has been opened for five years, up to $10,000 of earnings can be withdrawn tax- and penalty-free for the purchase of your first home. Say $5,000 goes into a Roth each year for five years for a total contribution of $25,000. Assuming the account earns an average of 8% a year, at the end of five years, the Roth would hold about $31,680 -- all of which could be withdrawn tax- and penalty-free for a down payment.
Convert to a Roth IRA. Switching a traditional IRA to a Roth requires paying tax on the converted amount, but that can be a fabulous tax-saving investment because all future earnings inside the Roth can be tax free in retirement. (Withdrawals from traditional IRAs are taxed in your top tax bracket.) If you convert to a Roth in 2010, you have up to three years to pay the tax bill. Rather than reporting the income (and paying tax on the conversion) with your 2010 return, you can report half of the conversion on your 2011 return (due in 2012) and the remainder on your 2012 return (due in 2013). See our Special Report on Roth Conversions.
Undo a Roth conversion gone bad. When you convert a traditional IRA to a Roth, you must pay tax on the amount you convert. But what if the investments in the new Roth IRA fall in value? You get a chance for a do-over. You have until October 15 of the year following the conversion to 'unconvert' and avoid paying tax on the money that evaporated. You c
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