“It's not too late to cut your 2010 tax bill," explains Andrew Schwartz CPA, founder of FindAGoodCPA.com a site where taxpayers can locate a CPA or EA in their metropolitan area based on that tax professional's specialty.
Start by making decisions about three tax breaks with a December 31st deadline. The first is whether to convert an IRA and other retirement account to a Roth IRA prior to 12/31. "As of January 1, 2010, taxpayers with incomes exceeding $100,000 finally have the opportunity to convert their traditional IRAs and other qualified retirement accounts into a Roth IRA. Plus, people who convert during 2010 can choose to report all of the income on their 2010 returns, or can split the income from the conversion over the following two tax years - 2011 and 2012," says Schwartz.
The second tax break can put up to $1,500 into a person's pocket. "You only have through December 31, 2010 to purchase energy efficient improvements for your home and qualify for a lucrative tax break. The maximum credit is equal to 30% of the first $5,000 spent on high-efficiency heat pumps, air conditioners, and water heaters, or energy-efficient windows, doors, insulation materials, and certain roofs. You can also claim the credit for certain types of asphalt roofs and for stoves that burn biomass fuel," says Schwartz.
And anyone in the 15% tax bracket should consider selling some of their investments that have increased in value since the capital gains rate will be 0% for these taxpayers, and this rule is slated to expire on 12/31/10. "You can then buy back those securities, and the 'cost-basis' will be the higher amount. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains don't push you out of the 15% tax bracket, or you'll be taxed on those gains that fall outside that bracket. You should also be cognizant of the commissions and other transactions fees you might incur."
Other year end planning opportunities include:
- Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year. This year you can put up to $16,500 into your 401(k) or 403(b) plan. Anyone 50 or older by December 31st can put away an additional $5,500. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
- If you’re self-employed, consider setting up a Solo 401(k) by 12/31. A Solo 401(k) plan lets a self-employed person hit the $49k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $54.5k into a retirement plan for 2010.
- Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.
- Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.
- Send in your January 2011 mortgage payment early enough so it will be processed prior to 12/31/10. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
- Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition. Remember, only donations of clothing and household items in "good condition or better" qualify for a deduction. (To track what you donate, we recommend that you use the App UDoGood.)
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2011. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.
- Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.
- Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.
- Pre-pay and pay-off your unreimbursed professinal expenses and your investment advisor fees if your total miscellaneous itemized deuctioni exceeds 2% of your income, you'll be itemizing your deductions, and won't be subject to the alternative minimum tax. Using a credit card to make the payment will work, since you'll base the deduction the transaction date.
"And finally, evaluate whether you'll save any taxes by postponing 2010 income or deductions into 2011 or by accelerating 2011 income or deductions into 2010," says Schwartz. Plenty more information about saving taxes is available at FindAGoodCPA.com.
