Quick advice you might have missed.
- Maximize retirement plan contributions.
- Tax advantage of Flexible Spending Accounts.
- Gift appreciated stocks rather than cash to charities.
- Take advantage of education credits.
- Take advantage of expanded energy tax credits
- Make use of the annual gift tax exclusion.
- Hire your children to work in your business.
- Make sure to deduct points on residential loans.
- Plan for taxability of social security benefits.
- Consider year-end tax planning.
- Realize losses.
Make sure that you are contributing the maximum amount to your retirement plans (e.g., 401(k)s, 403(b)s, SIMPLE, IRAs, SEPs and / or Keogh plans). If your employer makes matching contributions, then make sure that you are contributing enough to take full advantage of the match feature.
If established by your employer, then consider using pre-tax wages to pay for eligible health and / or dependent care expenses.
Gifts of stock to a charity have a very significant tax advantage. You receive a tax deduction for the fair market value of the stock given. However, you do not have to pay the capital gain tax as you would if you had sold the property and then contributed the proceeds.
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 through 2012, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:
- Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
- Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.
Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.
There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of a post-secondary education.
Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.
The Non-business Energy Property Credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.
The Residential Energy Efficient Property Credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.
Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s Web site or the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits. Use Form 5695, Residential Energy Credits, to figure and claim these credits.
If you have or expect to have a taxable estate, you can make a significant reduction in your taxable estate by making gifts of $13,000 to your children and to other donees. If your spouse lacks separate resources to take advantage of the exclusion, you can give $26,000 to each donee provided that your spouse consents to gift splitting.
If you own your own business consider hiring your children. You can get a tax deduction for the wages paid to your children and the children will generally pay tax on the wages at a lower tax rate. These wages could also be used to fund Roth-IRAs for your children.
Generally, for taxpayers who itemize, the "points" paid to obtain a home mortgage may be deductible as mortgage interest. Points paid to obtain an original home mortgage can be, depending on circumstances, fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.
If you received Social Security benefits plus other income, the answer to how much, if any, is taxable can be found in the worksheet in the Form 1040 or 1040A instruction book.
For a quick computation, add one-half of your Social Security benefits to all your other income, including tax-exempt interest. If this amount is greater than the base amount for your filing status, a part of your benefits will be taxable.
The 2010 base amounts are:
- $25,000 for single, head of household, or qualifying widow/widower with a dependent child
- $25,000 for married individuals filing separately who did not live with their spouses at any time during the year
- $32,000 for married couples filing jointly
- $0 for married persons filing separately who lived together during the year.
If you find that you will have taxable social security benefits, then tax planning may be beneficial so that you can plan your income to minimize the amount of social security benefits that will be taxable.
While some tax strategies can be taken after year end, most require that they be done prior to year end. Year-end tax planning involves assessing your individual tax situation and planning such that you minimize the amount of taxes you pay for the current year and/ or over the long term.
You are allowed to deduct $3,000 of capital losses, in excess of capital gains in each tax year. Losses over $3,000 can be carried-forward to offset future capital gains. Other than the transaction costs, there is little downside in converting unrealized losses into realized losses in your taxable investment accounts unless you anticipate a near term rise in a particular security. Remember, you must wait 31 days before repurchasing a security sold at a loss to avoid "Wash Sale" treatment.
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