While "death and taxes" are said to be the only certainties in life, tax planning isn't always that straight forward. Especially in light of the still wavering economy, there is more of a need than ever to take advantage of various tax strategies, in an attempt to stretch your every dollar.
With tax season approaching, many are feeling overwhelmed by the complexity of tax planning. There are many factors to take into account that can leave an individual feeling in over their head, including a variety of tax deductions, changes in the 1040 tax form, and rules for people who converted a traditional IRA into a Roth in 2010.
Right off the bat, you have a leg-up on tax planning compared to past years, as taxes are due on April 17. The traditional April 15 filing deadline for the Form 1040 falls on a Sunday this year, and April 16 is a holiday in Washington, D.C. (Emancipation Day), so you have an extra two days to make the most of tax deferral options. If you still need more time, you can extend the filing deadline as far as Oct. 15 by submitting an extension request.
Before you sit down with your 2011 W-2 and 1099s, there are other changes to be aware of in the 1040 tax form other than its due date. With policy changes such as new securities-broker reporting requirements, and The 2009 Stimulus Act expiring this year, "Do-it-Yourself" options should be considered carefully. Seek the professional recommendation of a certified Public accountant to find out ways to potentially lower your taxable income and understand each change affecting the 2011 tax year.
For example, if you're part of the group who converted a traditional IRA into a Roth IRA in 2010, that conversion was considered a taxable liquidation of your traditional IRA. This means that if you chose to defer the "tax hit" from the 2010 conversion, discuss with your accountant about reporting half the amount for 2011, with the other half remaining deferred until 2012.
You may also want to study up on the re-characterization rules of your Roth IRA. Perhaps you converted your traditional IRA in 2010, but since then, your account value has declined in value due to unfavorable market conditions. Instead of paying taxes on the total amount that was converted, you could re-characterize all or a portion of the Roth IRA back into a traditional IRA.
As it turns out, even when it comes to taxes, there is a lot to navigate. People should make sure that they are as knowledgeable about the process as possible before they begin filing. Armed with the guidance, information and resources necessary, tax planning doesn't have to be a stressful responsibility, but a strategic means to stretch your hard earned dollar.
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