The income tax filing deadline is months away, but you shouldn’t wait to assess your tax situation. Some moves must be made before 2010 is over if you want the benefits on this year’s return.
1. Check Your Withholding
If you’re worried that you haven’t paid enough in taxes through payroll deductions, take a look at a recent pay stub to see what you’ve earned for the year and what you’ve paid in taxes. Take those numbers to the withholding calculators for the Internal Revenue Service (www.IRS.gov) or Kiplinger (kiplinger.com) to see if you’ve been overpaying or underpaying. You also could also ask your tax preparer for an analysis. If you don’t like what you see, ask your boss to increase your withholding through the rest of the year so you come closer to even, rather than owing, on April 15.
2. Defer income
If you know you have a year-end bonus coming but you want to limit your 2010 taxable income, ask your boss to pay you after Jan. 1. Same goes if you’re an independent contractor or you receive freelance income. However, be aware that many believe tax rates will be going up and that delayed income could be subject to those higher rates.
3. Give to charity
You must make charitable donations before Dec. 31 in order to deduct them on your 2010 return. So consider making contributions now and save your proofs of payments.
4. Sell losers
If you have losing investments, consider selling now to offset capital gains taxes you may owe on winning investments that you sell. If you have only losers, you can deduct up to $3,000 for the tax year. If you have even bigger losses, you can carry over those losses as deductions for future tax years.
5. Prepay property taxes
If you pay property taxes due in 2011 before this year is over, you may be able to take the deduction on your 2010 return. Another important concern: The IRS does not permit you to prepay any expense just to avoid tax. “If you prepay one-fourth of your property taxes ahead of time, this can be construed by the IRS as tax avoidance and the deduction can be disallowed,’’ says Gail Rosen, a Martinsville-based certified public accountant. If your taxable income is going down in the future, perhaps due to job loss, you may benefit from paying taxes now as long as you are not in the alternative minimum tax system. The AMT is aimed at stopping the rich from paying fewer taxes because of a large number of deductions. If you’re subject to AMT, you are not permitted to deduct property taxes, so prepaying does you no good. Check with your tax adviser before making any moves
6. Pay those medical bills — or don’t
In order to deduct medical expenses on your federal return, costs must exceed 7.5 percent of your adjusted gross income. On your New Jersey return, medical expenses must exceed 2 percent of your gross income. If you’re having a pricey year for medical bills, it may be smart to undergo other needed medical treatment before the year ends, so you can use those expenses to reach the percentage thresholds. Also, if you know 2011 will be a big year for medical costs, hold back on making 2010 payments until the new calendar year so you can add those expenses together, giving you a potentially bigger deduction next year.
7. Pay your pros
If you use a financial planner, estate planning attorney or tax preparer, fees may be tax-deductible. Rosen says if you take the deduction for accountants and attorneys on Schedule A on your federal return under miscellaneous deductions, you’d get a benefit for these miscellaneous deductions only if they exceed 2 percent of your adjusted gross income. Also, any benefits you get from miscellaneous deductions that exceed 2 percent of your AGI are subject to an add-back for AMT purposes.
8. Boost 401(k) contributions
Every dollar you contribute to a 401(k) will lower your taxable income for the year. If you earn $75,000 but save $10,000 to your 401(k), you’ll have only $65,000 of taxable income. Also, the money you save will grow tax-deferred until you withdraw it. For 2010, you can save a total of $16,500; and if you’re older than age 50, you can save an additional $5,500 “catch-up” contribution. If you’ve been saving less than the maximum, you can up your contributions each pay period until the end of the year.
9. IRA Savings
You have two options when it comes to IRAs: a traditional IRA or a Roth IRA. A traditional IRA, depending on your income level, may give you a tax deduction in the year you make the contribution. The money then grows tax-deferred until it’s withdrawn after you’re 59½. A Roth IRA won’t give you a current tax deduction, but the funds grow tax-deferred and are then tax-free when you make withdrawals after age 59½. You can save a maximum of $5,000 in IRAs for 2010, and if you’re older than 50, you can save an additional $1,000 “catch-up” contribution. These contributions can be split between IRA types, but they can’t exceed the annual limit between the two accounts. You actually have until the tax-filing deadline to make IRA contributions, but why wait? Better to invest as soon as you can to get your money working for you in a long-term investment. Also only for 2010, investors of any income level can convert their traditional IRAs to Roths. Talk to your tax adviser or financial planner about whether the move is a smart one for you.