The filing deadline for 2011 federal income taxes is not far off, but you still have time to make sure you’ve done everything you can to keep as much of your money as possible. Earning money is tough enough; keeping it is even harder. Here are some last-minute ways to do that by reducing your 2011 income tax bill.
1. Save More for Retirement
One of the most important tax-savings steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plan. If you haven’t done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2011, you may put as much as $16,500 into a 401(k), 403(b), or 457 plan. If you’re over age 50, you may add an additional $5,500.
Every dollar you contribute means you will pay less income tax. Except for the new Roth IRA, all contributions to tax-deferred retirement plans are tax deductible in the tax year for which you make your contribution.
If you’re in the 28 percent tax bracket, for every $100 you contribute, your federal tax bill decreases by $28. Your total savings will actually be higher when you factor in savings on state taxes. Obviously, the higher your tax bracket, the higher your savings.
This is “found” money. Whatever you do, don’t walk away from it. Of course, many people are not in a position to contribute the legal maximum, especially in this economy. If you can’t come up with the maximum, bump up your contribution as much as you possibly can. It may seem painful now, but you’ll benefit greatly in the future.
You must make your contributions no later than the time you file your 2011 return, and you may make deposits for 2011 only in accounts that you opened prior to December 31, 2011.
2. Don’t Forget Sales Tax
Do you still have records of large purchases made in 2011? You now have a choice of deducting either your state and local income taxes or state and local sales taxes, but not both.
If you live in a high tax state such as Ohio or Massachusetts, you’re probably better off continuing to take the deduction for state income and property taxes. However, for residents of states like Florida and Texas, which have no separate income tax, the sales tax deduction can significantly reduce federal taxable income.
Can’t find your sales receipts? Not to worry: the Internal Revenue Service (IRS) has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. You’ll find the tables on the IRS website: www.irs.gov. Type “estimated state sales tax” in the search box to get the calculations.
3. Have Kids in College?
If you’re dishing out big bucks for college tuition, you might be able to get some of them back.
There are two education credits and a tuition deduction for which you may be eligible. A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. If you’re in the 28 percent bracket, your $100 deduction will reduce what you owe by $28 ($100 x 0.28).
The Hope Scholarship Credit is for taxpayers whose children (or themselves) are in their freshman or sophomore years in college. It offers a maximum tax credit up to $1,800 for 2011. The Lifetime Learning Credit offers the possibility of a credit up to 20 percent of the first $10,000 in tuition you pay, for a maximum credit of $2,000; 2011 may be the last year for this credit.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction.
Details and earnings limitations on education deductions and credits are complex, so it’s best to check with your tax advisor to see if you are eligible.
Also, don’t forget the Child Tax Credit that has been extended through 2012. The Child Tax Credit allows you to claim a maximum $1,000 per qualified child. Remember, a tax credit is a direct subtraction from your actual taxes owed, which is much more valuable than a deduction.
4. Overlooked Deductions
Many easily overlooked miscellaneous expenses are deductible as long as they add up to at least 2 percent of your adjusted gross income. Grouping them together can help you meet the 2 percent threshold. Following are some miscellaneous items you may have overlooked.
Tax Preparation Costs. You may claim the cost of personal income tax preparation software or books as a miscellaneous deduction. If you hire a professional tax preparer to do your taxes, you may also be able to deduct the fee.
Interest from Home Refinancing. If you refinanced a mortgage and still have unamortized points left to deduct from an earlier refinancing, you can claim all the unamortized points from the earlier refinancing as deductible interest.
Purchases Financed By Loans or Credit Cards. If you made large purchases on your credit card or with a loan, don’t forget to deduct any interest costs involved.
Be careful when taking advantage of miscellaneous deductions. Document everything. If the IRS decides to question you about any of your deductions, it will want to see all of your pertinent receipts and statements.
Proceed with Caution and Guidance
Check your math and be sure to get the correct tax amount from the tax table if you use it. The other numbers to be most careful about are identification numbers—usually Social Security numbers—for each person listed on the return.
When you mail your return, be sure to get it to your local post office before the last pickup of the day. Some post offices stay open late to accept returns for a deadline-day postmark. You may also use one of the designated private delivery services to meet the filing deadline. The four companies—Airborne Express, DHL Worldwide Express, Federal Express, and United Parcel Service—can provide details on which of their services qualify and how to get proof of timely filing.
Keeping your personal income tax to the legal minimum requires a little planning and effort on your part, but the time you spend chipping away at your taxes may be among the most profitable investments you’ll make this year.
William J. Lynott has an extensive background in management consulting, marketing, and finance. He’s written more than 900 articles appearing in a wide range of consumer magazines, trade publications, and newspapers in 17 countries. Contact him at lynott@verizon.net.
Plan Now for 2012 Taxes
The best way to pare your personal and business income taxes to the legal minimum is to avoid the last-minute rush to beat the filing deadline. Here are a few tips that will help you minimize taxes for 2012.
Organize Your Records
If you scramble every March and April looking for receipts and other records to pass along to your accountant, you’re probably missing out on some healthy deductions. Start out right by organizing your records as they accumulate. Set up manila folders for expense and income records and file them as they occur.
Maximize Your Tax-Deferred Retirement Account Early
Don’t wait until filing time to fund your retirement account. Making the maximum allowable deposits into your retirement account as early in the year as possible not only reduces your tax load, it also adds months to the tax-deferred compounding of your investment.
Home Equity Interest
If you have a high-interest car loan or a large credit card balance, you may want to consider taking out a Home Equity Loan at a lower interest rate to pay them off. You can generally deduct interest you pay on the first $100,000 of a home equity loan. However, there are some limitations, so you should consult with your tax advisor on your eligibility.
Balance Investment Gains and Losses
Keep a close eye on your investment performance during the year. By selling appreciated assets and liquidating under-performing investments, you may match gains and losses to minimize your personal income taxes. The amount of capital losses you can use to offset ordinary income is limited to $3,000. If your net loss totals more than $3,000, don’t worry. You can carry forward the losses over $3,000 every year until you use them up.
The IRS toll-free help line—800-829-1040—is available from 7:00 a.m. to 10:00 p.m. ET weekdays. The website (www.irs.gov) has interactive tax aids, forms, and publications for downloading.
If you’re unable to complete your return on time, you may request an automatic extension to August 15; Form 4868 has details.
An extension gives extra time for filing only, not for paying any balance due. Interest will apply to any tax not paid by the April deadline, plus a late payment penalty if you pay less than 90 percent of the total tax on time.