For many, mid-November through New Year's Day is a blur of activity when important tasks get ignored. Who has time to review their benefits and tax paperwork when holiday planning looms overhead?
But what if spending a few minutes on such mundane tasks could shave hundreds of dollars or more off your taxes? Here are a few suggestions:
Review your 401(k). If you haven't already maxed out, ask your employer if you can make a catch-up contribution to your 401(k), 403(b) or 457 plan before year's end. Most people can contribute up to $16,500 in 2010, plus an additional $5,500 if they're over 50.
If you contribute on a pretax basis, your taxable income is reduced, which in turn lowers your taxes. Plus, if your employer offers matching contributions (essentially, free money), be sure to contribute at least enough to take full advantage of the match. Various online calculators can help you estimate the impact additional contributions will have on your taxes.
By the way, the maximum 2010 contribution to a regular or Roth IRA is $5,000 ($6,000 for those 50 and older), and you have until April 15, 2011, to make one.
Use up your FSA balances. If you participate in employer-sponsored health care or dependent care flexible spending accounts (FSAs), which let you use pretax dollars to pay for eligible expenses, be sure to spend the full balance before the plan-year deadline (sometimes up to 75 days into the following year); otherwise, you'll forfeit the remaining balance.
You can use your health care FSA for copayments, deductibles and medical devices (e.g., glasses, contact lenses and braces); however, effective January 1, 2011, over-the-counter medicines will only be eligible with a doctor's prescription (an exception is made for insulin), so you may want to stock up before year's end. Read IRS Publication 502 for a complete list of allowable and non-allowable expenses.
Charitable contributions. If you plan to itemize deductions on your 2010 taxes, charitable contributions made to IRS-approved organizations by December 31, 2010, are generally tax-deductible. (See IRS Publication 78 for a complete list of organizations.) If you've got extra cash now and want to lower your 2010 taxes even further, consider moving up donations you would have made in 2011.
Energy tax credits. Allowable tax credits for certain energy-efficient improvements to principal residences will be reduced after December 31, 2010, unless Congress votes to extend 2010 levels. Until then, you can claim a tax credit for 30 percent of the total cost of eligible products purchased in 2009 and 2010, up to a maximum combined credit of $1,500 per household.
Eligible products include: biomass stoves; heating, ventilating and air conditioning (HVAC) systems; insulation; roofs (metal and asphalt); windows and doors; and non-solar water heaters. Carefully review the government's Energy Star website to make sure your purchases qualify.
The good news is that the tax credit for certain other improvements, including geothermal heat pumps, residential wind turbines and solar energy systems, is slated to last until at least December 31, 2016. This credit is for 30 percent of cost with no upper limit, and both existing and new-construction principal and second homes qualify.
Gifts. You're allowed to bestow a total of $1 million in gifts during your lifetime before the federal gift tax kicks in. One way to exceed that limit -- and avoid having to file a Gift Tax Return -- is by giving separate, annual gifts of up to $13,000 per year, per person. (Married couples filing jointly can give $26,000 per recipient.) Rules for gift and estate taxes are complex, so read IRS Publication 950 and consult your financial advisor.
Roth IRA conversion. People at any income level can now convert part or all of their existing traditional IRAs or 401(k) plans from previous employers into a Roth IRA. Note that converted balances (for pretax savings and their earnings) get added to your taxable income, thereby increasing your taxes -- and possibly boosting you into a higher tax bracket for the year.
However, if you're a long way off from retirement, or believe that your income tax rate at retirement will be higher than it is today, such a conversion might make sense. To help ease the burden, for 2010 conversions only, half of the converted amount will be added to your 2011 taxable income and half to your 2012 taxable income. Or, if you prefer, you may have the entire amount added to your 2010 taxable income.
Remember: The deadline for 2010 Roth IRA conversions is December 31, 2010.
Just make sure you don't need to borrow money -- especially from a retirement account -- to pay for the additional tax burden today; otherwise you could undo the potential long-term tax advantage of converting to a Roth IRA.
Because of the complexity of such transactions, it's probably best to consult a tax or investment professional for the best strategy in your particular situation.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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