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End of year tax tips are rolling in. Below I paraphrased the best 15 tax tips that I received from Grant Thorton, TurboTax, H&R Block, and Free From Broke.
1. Get a tax question answered for FREE at through Jan. 31, 2011. It can be about personal, federal, state, or business taxes. You’ll get an email or personal call back at a time you request.
2. Understand how due to the Affordable Care Act will affect your taxes.
3. Adjust timing of income and deductions. If tax rates are expected to rise next year, see what wiggle room you have to count income and deductions in the current tax year. Paying taxes now at a lower rate may save you money in the long run. If tax rates are expected to sink next year, do the reverse. Some of the income you may be able to control includes bonuses, consulting income, or self-employment income. For deductions, can you defer state and local income taxes, interest payments and real estate taxes? Beware of the alternative minimum tax (AMT), which can affect timing strategies.
4. Bunch itemized deductions. Bunch deductions so they exceed a certain percentage of your adjusted gross income (AGI), thereby allowing you to deduct them at all. Can you schedule non-urgent medical procedures into one year to surpass the 7.5% AGI floor for medical expenses? To exceed the 2% AGI minimum for miscellaneous expenses, bunch professional fees such as legal advice and tax planning, and unreimbursed business expenses such as travel and vehicle costs. If you can bunch these deductions together next year, you may get a bigger payoff.
5. Clean out your closet and donate anything you haven’t worn in at least a year to Goodwill or The Salvation Army. These items are worth much more than you may think and can be a valuable deduction.
6. Max out “above-the-line” deductions. Above-the-line deductions reduce your AGI, making them especially important for reducing your tax burden. Above-the-line deductions include traditional IRA and Health Savings Account contributions, moving expenses, self-employed health insurance costs, alimony payments and any bank penalties you may have had to pay for early account withdrawals.
7. Review charitable contributions. If you donate appreciated property to charity, you can deduct the full value without paying capital gains taxes. With depreciated property, sell the item first and give the proceeds to charity so you can take both the capital loss and a charitable deduction. Make sure to double-check the limits and substantiation rules on contributions. And don’t forget No. 3. If your tax rate is going to increase in 2011, your contributions and deductions may be more valuable if you push it off.
8. Volunteer. You can deduct out-of-pocket costs, like mileage and supplies.
9. Make up a tax shortfall by increasing withholdings. If you suspect you have underpaid your taxes through the year and may get smacked with an underpayment penalty, increase your withholding on your salary or bonuses. Play it safe by paying estimated taxes equal to 110 percent of your estimated tax liability.
10. Contribute to your retirement account. Retirement accounts offer some of the best tax savings and you can make a contribution to your 401(k) or IRA as late as April 15, 2011. The 2010 contribution limits are $16,500 for a 401(k) and $5,000 for an IRA (or $6,000 if you are over 50). Regardless of where tax rates go, it almost always makes sense to max out these retirement vehicles.
11. Make energy-efficiency enhancements to your home, some of which are tax deductible. Ask a sales associate or look for product information online.
12. Roll over into a Roth account. “Roth” versions of the 401(k)s and IRA don’t get you a tax break when you put money into them, but the money grows tax-free and is never taxed again. Rolling over into a Roth makes sense now because tax rates are low, and many accounts has been devalued by the downturn. Paying tax on the rollover now could save you if tax rates go up and your account recovers. Starting this year, the $100,000 AGI limit on these rollovers is lifted so even high-income taxpayers can convert their retirement accounts this year. Be prepared to pay tax on the converted amount.
13. Don’t forget to use annual gift tax exclusion. If you may have to pay estate taxes, establish gifts for your children and grandchildren to take advantage of the annual gift tax exclusion. Gifts of up to $13,000 per donee ($26,000 for married couples) are generally excluded from gift tax in 2010 and will be removed from your estate, with no limit on the number of donees. In addition, payments of tuition to an educational institution for the benefit of your children or grandchildren are excluded from gift tax.
14. Invest in education for your child, niece/nephew, or grandchild’s college education by contributing to a 529 college savings plan. (These can lower your federal tax bill and in some cases, state taxes as well.) Paying higher education tuition for the spring early so you can deduct it for you 2010 taxes may also help.
15. Get early access to W-2s so you can plan ahead. Ask your accountant about getting an end-of-year tax estimate with ways to lower your tax burden.