With the end of the 2010 tax season in sight, time is running out to optimize your 2010 tax deductions. Even if it is too late for you to capitalize on some of these deductions in 2010, it is never too soon to begin planning for 2011 and beyond.
Tax laws are constantly changing and depending on various political and economic factors, the government offers a variety of tax incentives. Some of these economic factors exist year after year, while others are only offered for certain accounting periods. With this in mind, here are 10 ways that you can legally reduce the taxes you pay to Uncle Sam.
- Put More Toward Retirement: Probably the easiest way to pay less in taxes is to simply decrease your taxable income. Since no one in their right mind would agree to work for less money simply to avoid taxes, the best way to go about decreasing your taxable income is to channel money into tax shelters, such as retirement accounts. Presumably you will need to save for retirement anyway, so why not maximize your tax breaks by diverting as much as you can into an IRA? You can save up to $16,500 per year in an IRA and up to $22,000 if you are 50 or older by the end of each tax year.
- Pay as Much as You Can With Pre-Tax Dollars: If your employer has a Dependent Care Account, you may be able to put up to $5,000 per year in pre-tax dollars for daycare or elder care. Your employer may also offer an option to use pre-tax income to fund your health insurance thorough a health insurances savings account, health reimbursement arrangement or a flexible spending account. Make sure to check with your Human Resources Department to find out if any of these options are available to you, and when the next open enrollment period is so that you can start saving as soon as possible.
- Go Green and Save on Your Taxes: You can currently claim up to 30 percent of the amount you spent installing any alternative energy equipment – sometimes including labor costs – and there is no cap on this tax break. This includes the installation of solar water heaters, wind turbines and geothermal heat pumps. Other home improvements that can reduce your energy consumption also qualify for a 30 percent tax credit up to a limit of $1,500. This can be anything from insulating your attic to replacing windows and doors with more energy-efficient models. Be sure to check with your accountant about these energy tax credits since some will be expiring or will be limited after December 31, 2010.
- Convert to a Roth IRA: Converting to a Roth IRA will not get you a tax break immediately at the time you put money into your retirement account, but it will mean that there are no taxes on your withdrawals. Many people find this attractive because as you get older, the tax rates are likely to increase and it is possible that you will be in a higher tax bracket when you are ready to start withdrawing money. This is a good option if you are currently in a lower tax bracket, therefore paying less than you will be down the road. Currently, tax breaks are given for converting to a Roth IRA but they will go away after 2010, so take advantage of this soon to reap the benefit. If this is something you are considering it is a good idea to talk with a financial planner to ensure this is a good option for you, but act soon.
- Name Your Beneficiaries: The ones you leave behind can run into hefty taxes if the money from your IRA goes to your estate rather than to named beneficiaries. While this won’t save “you” taxes, it will save your loved ones money owed to the government when your time comes.
- Maximize Tax-Free Profit on Home Sales: You can claim up to $250,000 tax free on the profit from your home sale and up to $500,000 if you are married. For this reason, it will be a worthy investment for you to make those minor improvements to your home now to maximize your profit. The IRS imposes strict regulations on what qualifies and the amount of years you lived in your home, so if this is something you are considering doing, it is a good idea for you to work with your accountant.
- Consider Treasury Bills to Defer Taxes: Interest on treasury bills is not taxed until the bills are sold. This makes treasury bills a good way to get a stable return while deferring tax until the year the bills mature, unless of course the dollar’s value falls. The other good thing about treasury bills is that you will not owe state or local taxes on the interest earned, but will be subject to federal taxes. Check with your investment professional first before considering the purchase of treasury bills.
- Buy a Hybrid: To encourage the purchase of hybrid energy-saving vehicles, the US Government offers tax savings on a number of models from various manufacturers. This tax break is expected to end at the conclusion of 2010, so if you are planning to buy a car, be sure to make it a hybrid and get it into service before the tax break expires. Be sure to check with your car dealer or manufacturer that a make and model is eligible, because the tax credit phases out depending upon how many vehicles were sold by each manufacturer.
- Keep Track of Moving Expenses: If you moved for the purpose of a new job (needs to be a certain amount of miles from old job), then you can deduct your moving expenses. All costs associated with your move are considered tax-deductible. This includes hiring movers, lodging, auto mileage and any other expenses incurred from the move.
- Watch Out for Home Equity Loans: Previously owed interest on home equity loans of up to $100,000 can be claimed on your tax return regardless of what the loan was used for, but now the loan has to be used for the purposes of home improvement or renovation to qualify.
There are a number of creative ways to pay less in taxes, but you need to be vigilant about what can and cannot be claimed to maximize your benefits. Every year, tax rules change (2011 changes) and more opportunities to take large tax credits become available. It is most beneficial to look start looking for these new opportunities at the beginning of each tax year so you have ample time to plan.