10 tax tips for 10/10/10
Sunday, October 10, 2010
I'm not a numerology freak. And I don't have any particular financial superstitions.
But I just couldn't let the 10th day of the 10th month of 2010 go by unmentioned.
So of course I decided to go the list, and easy headline, route.
Even though we're all still waiting for Congress to finalize our 2010 tax laws -- those tax extenders still hanging out there -- as well as what our 2011 taxes will be, there are some tax moves we still can take. Here goes!
1. Meet the Oct. 15 filing deadline -- If you got extra time to file your 2009 Form 1040, you are running out of time. That form is due this coming Friday, Oct. 15.
If you are old school, you need to have your tax paperwork postmarked by Oct. 15. Send it registered mail so you'll have proof you met the deadline.
You also can e-file your return by midnight Friday. And yes, the IRS' Free File program is still open for extended returns.
2. Adjust your withholding -- What was your 2009 tax bill? Regardless of whether you owed Uncle Sam a lot or got a nice refund from the IRS, you need to adjust your withholding. There's not a lot of time left in the tax year, but getting your withholding correct even at this late date will help.
3. Give to your favorite charity -- The holidays are just around the corner and you'll soon be so busy you might forget about that donation you want to make. Do it now. You can make a cash contribution or drop off actual items you no long use. If you itemize, then you'll be able to claim the gifts on your Schedule A.
If you want to give money, you're not limited to writing a check. In the IRS' eyes, donations made by credit card count as cash contributions.
As for donated goods, make room now in your closet for the stuff you'll be getting over the holidays. Just make sure that your previously-worn apparel or household goods are in good shape. The tax rules changed a few years ago to prevent people from using charity donation bins as garbage cans.
And, regardless of the value or amount of your donation and which type of contribution you make, get a receipt. That's also a new requirement. Without one, an IRS auditor can automatically disallow your deduction.
2011 ALERT: Given the uncertainty of next year's tax laws, both of these charitable donation moves work best for taxpayers in the middle-to-lower income tax brackets. Those rates and the amount of income they cover are likely to stay close to 2010 levels. But if you make a lot of money, you might want to wait and save our donations until next year. That way, if the Bush tax cuts aren't extended and your tax rate goes up, your charitable deduction will be more valuable.
4. Contribute to your retirement account -- If you have a traditional IRA, you can put up to $5,000 in the account possibly get a tax deduction when you file your 2010 return. For account holders age 50 or older, the maximum contribution increases to $6,000.
If you have a Roth IRA, there's no deduction, but when you eventually take out the money, you won't owe any taxes. The contribution amounts are the same as for a traditional IRA.
If you have a 401(k) plan at work and can increase your payroll contribution amount, do so. That money comes out of your pay before payroll taxes are calculated, thereby lowering the taxes on your check just a bit.
5. Convert your traditional IRA to a Roth -- I repeat, Roth retirement accounts are appealing to many because qualified distributions are tax-free. But if you make a lot of money, you can't open or contribute to a Roth.
You now can, however, convert a traditional IRA to a Roth IRA, regardless of your adjusted gross income. Note, though, that you'll have to pay tax on some converted money. And for some, that might not be worth it once they evaluate their financial outlook in retirement.
6. Maximize your FSA -- A medical flexible spending account, or FSA, is a good way to put away pre-tax paycheck dollars. You then can use that money to pay for unreimbursed medical expenses or your regular copay amounts. If you have an FSA, start thinking now about ways to spend all of your FSA money. If you have extra cash in your account at the end of the benefit year, you'll typically lose it.
And if considering opening an FSA during your company's benefits enrollment season, which is now for most workplaces, remember that in 2011 there will be restrictions on paying for over-the-counter drugs with FSA funds.
7. Set up a bunching plan -- Most people claim the standard deduction because those amounts are larger than the total expenses they have to itemize. But if your eligible expenses are close to your standard deduction amount, start looking now at ways to bump that figure up so that you can claim the larger amount when you filer your 2010 return. This is known in tax-speak as a bunching strategy.
2011 ALERT: As noted with charitable donations, all Schedule A claims for the 2010 tax year need to be considered in light of possible higher tax rates next year. Higher wage earners who could face higher taxes in 2011 should delay deductions where possible until next year, when they'll be more tax valuable.
8. Get your home ready for winter -- Winter will soon be here. Is your house ready? If not, you can make some relatively easy energy-efficient home improvements. Even better, Uncle Sam will help pay for them. The $1,500 tax credit for home-energy improvements is still available for this tax year. Just make sure you haven't already used up this tax break. If you claimed the maximum credit on your 2009 return, sorry. But if you didn't, or only claimed a portion of the credit on your previous Form 1040, max out for 2010!
9. Evaluate your portfolio -- The tax rate on capital gains and qualified dividends is likely to go up next year. You can still take advantage of the 2010 low rates -- 15 percent for most investors, zero taxes for folks in the 10 percent and 15 percent tax brackets -- by selling assets that have gained in value by Dec. 31.
Yes, I know. It's never fun to pay taxes on these earnings. But you will have to eventually, so it's worth considering doing so now while the tax rates are still low. Again, look at your overall investment plan before making any moves, tax-related or otherwise.
2011 ALERT: There is talk in Congress of keeping the dividend tax rate next year at the same level as capital gains taxes. Currently, the tax rate for both is 15 percent for most taxpayers. But in 2011, the capital gains tax rate will go back up to 20 percent (or 10 percent for lower-income investors) and all dividends will be taxed at ordinary income tax rates, which could be as high as 39.6 percent.
10. Reduce your taxable estate -- If you plan on living past Dec. 31, 2010, and have a sizable estate, consider reducing the amount that will be subject to the federal estate tax. Yes, it will be back in 2011. And unless Congress acts (not a sure thing given Capitol Hill's recent history!) the estate value exclusion amount will be just $1 million and the tax rate on assets worth more than that will be 55 percent.
You can give away some of you estate now in $13,000 increments to anyone -- a family member, a friend, me (just sayin'). Husbands and wives each get to give a $13,000 gift, making a married couple's combined giving worth $26,000 per person in reducing taxable estate assets.
Even better, there's no gift tax worries for monetary handouts that stay at or under the 13 grand limit as long as the giver's total doesn't top $1 million.
Once you reach that $1 million lifetime exclusion amount, though, you will have to pay the gift tax on the excess. But that's just 35 percent right now, 20 percent lower than the tax rate scheduled to take effect next year when the estate tax is resurrected.
Contact Congress: Here's a bonus tip, and one that's worth implementing even in years when the tax laws are more certain. Tell your members of Congress what you think.
If you see your Representative and/or Senators while they're in your area campaigning in advance of the Nov. 2 election, let them know your thoughts about pending tax legislation. If you don't run into them personally, you can still let their offices know, both before and after the election.
- No votes on tax cuts until November
- Some quick tax cut calculations
- OMG! What will happen to my tax bill if the Bush tax cuts expire!?!
- Obama advisers say 'yes' to all tax cuts
- Democrat vs. Republican tax cut graphics
- Democrats who support Bush tax cuts
- Representing the rich ... or not
- Tax cut timing could be costly
- Midyear Tax Moves 2010
- Year-round Tax Moves
- Weekly Tax Tips 2010
- Daily Tax Tips 2010
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