CARL WATTS & ASSOCIATES
October 18, 2010
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Washington DC
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tel/fax 202 350-9002 |
Year End Tax Savings
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This time of year if it is not too early to plan for Christmas or the New Year’s Eve, than you may very well want to make some year end tax planning as well.
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You will find many articles offering help and tips on how to make year end tax savings, but before you follow any advise please consider if there are any foreseeable changes in your income for the following year and if any of the tips applies favorably to your own financial status.
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 Defer income |
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You may be able to pay lower income taxes this year if you can defer income such as commissions and bonuses until next year. You have to be careful though and consider what your income and taxes will be for next year so that you will not actually increase taxes then.
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Increase deductions |
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If your tax deductions fall short of itemizing your deductions, you’re not affected by the alternative minimum tax and you don’t think you will be in a higher income tax bracket next year, you might consider the following options to accelerate your deductions:
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| Contribute the maximum to retirementaccounts |
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If you have employer-sponsored defined contribution retirement plans, such as profit sharing or 401(k), pay the maximum allowable amount before the end of the year.
Or if that is not the case, you may contribute up to $2,000 to an IRA, the whole amount is tax deductible. |
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Or you may want to establish a retirement plan before the end of the year (Keogh or 401(k)).
Or you may contribute to a self-employed retirement plan, if that applies to you. |
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Keep in mind that these contributions are not only tax deductible but they will also provide for your future retirement.
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Take the Roth IRA conversion |
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2010 is the first year when taxpayers regardless of their income are allowed to take advantage of the Roth Conversion. This conversion means that you move investments in a retirement plan that contains pre-tax dollars to a Roth account which holds after-tax dollars. The conversion also implies that you pay taxes up front to move your assets, but if your income is low it may cost you very little to do so.
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| Make energy-efficient home improvements |
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| Credit for energy-efficient home improvements is set to expire at the end of 2010, that is if Congress doesn’t decide otherwise. |
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If you have some home improvements on your mind (exterior windows and doors, roofs, heating systems, insulation) and make payments before the end of the year you can get a credit of up to 30% of the cost (credit limited to $1,500).
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Take tax credit for college |
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If you qualify for the American Opportunity Credit, you may take a credit for tuition and certain other expenses of the first four years of college. The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. You are allowed to prepay tuition for academic terms starting in the first 3 months of the next year, thus maximizing the benefit for this year.
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Make use of investment losses |
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You may consider selling stock from your portfolio that has depreciated in value and use the loss to offset capital gains and ordinary dividends.
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Accelerate capital gains |
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It might also be sensible to accelerate capital gains in 2010 as the long-term capital gains rate is scheduled to increase in 2011 from 15% to 20%, and the short-term rates will increase with the ordinary income tax rates.
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Make gifts for children |
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For 2010 the IRS allows you to give up to $13,000 to any number of people without you or the recipient paying any taxes.
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| Review withholding and estimated tax payments |
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You may want to make sure before the end of the year that your withholding and estimated tax payments are sufficient to avoid underpayment penalties.
Most important of all, please remember that there are no “one-size fits all” year end tax saving tips especially for 2010 and 2011. As with many other subjects related to your financial health, professional help is almost always the best option. |
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