Whether you are filing an EZ form, fighting an IRS penalty, undergoing an audit or just beating the April 17, 2012 deadline, these tips will help you put your best leg forward on the path to financial freedom.
1.IRA Contributions: You can still contribute to your IRA and receive credit for 2011, up until April 17, 2012.
Learn more about contributing to your IRA NOW on the IRA contribution page at IRS.gov. (Simply search for IRA on the IRS.gov page.) If you use a software program, like Turbo Tax, they will automatically encourage you to make your IRA contribution before completing your tax form. Your accountant is likely doing the same, and it's an excellent idea. Note that Roth IRA contributions are not tax deductible, however certain traditional IRAs allow you to deduct the contribution, meaning you get to pay yourself, instead of Uncle Sam. According to the IRS, "Amounts in your traditional IRA, including earnings, generally are not taxed until distributed to you," meaning no capital gains on your ROI (until you distribute the money).
2.Charitable Contributions. Your charitable contribution is tax deductible, provided it is made to a qualified 501c3. In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations. Get more information by clicking on the blue-highlighted link to the IRS web page.
3.Health Savings Accounts. Here's another way to increase your assets and beautify your bottom line, while giving less to Uncle Sam AND the insurance company. Health Savings Accounts work best for healthy people who have the ability to purchase catastrophic health insurance, while contributing to a tax-deductible health savings plan that can be invested for gains. Catastrophic insurance could save you hundreds of dollars in insurance premiums per month, which can be deposited into your HSA. If you don't need to dip into this account, it rolls over year after year until you retire. If you do need to pay for health care from the account, you can. And in the meantime, you also get a write-off for contributing, and are not taxed on gains you might make through investing the money. You must be a "qualified individual," but opening a HSA through a discount brokerage, like TD AMERITRADE or Schwab, is easy. To learn more, visit IRS.Gov and enter Health Savings Accounts in the search box. NOTE that opening a HSA with a brokerage will offer you more investment options than opening the account with the insurance company or bank.
4.Free Federal Online Filing is the easiest way to do your taxes. For a list of qualified software companies, click on the FREE File icon on the home page at IRS.Gov. Many of these programs ask as many questions as most accountants and aim to include the deductions you qualify for. And it's FREE for low-income easy-filers. (As you start adding more details to the return, then you may be required to pay for your filing.)
5.Education. You may be able to deduct education costs for yourself and/or a student in your immediate family. You may also be able to take an early distribution from an IRA without paying the early distribution penalty and additional taxes, if the withdrawal was made to cover a qualified education expense. And if the education is work-related, you may qualify for a business deduction. Most of the benefits apply to higher education. For additional information, read publication 970 at IRS.gov.
6.Energy Efficiency Credits. If you purchased an EV, converted your car to electric or installed solar or wind energy products, you could qualify for a generous tax credit. EV credits go up to $7,500 and wind/solar power products can be as high as 30 percent of the purchase price. For more information, go to the IRS Tax Tip # 2011-49, which was issued on March 11, 2011. If you want to buy an EV, but haven't yet, this tax credit is good now through 2014, or whenever the auto manufacturer sells 200,000 vehicles, while the Residential Energy Efficient Property Credit is good through 2016.
7.Facing an Audit or Penalty? Hire an experienced, qualified accountant to review your case and communicate with the IRS on your behalf. As Wayne Layton, CPA, reminds us, " From time to time the IRS may suspect an error on a tax return or underpayment of tax and send my clients a letter assessing additional tax, along with penalties and interest. Most taxpayers become fearful upon receiving these letters as some of them even refer to liens and levies. That fear that is felt by most, at times simply results in the client writing a check to the IRS in the amount shown as "balance due" on the letter. As I see it, the letters from the IRS are simply telling the taxpayer to pay or prove why you do not owe the balance. There are many times that, on behalf of my clients, I write a letter disagreeing with the IRS's position, attaching proof of why the taxpayer does not owe the additional tax, and the additional tax assessed is either reduced or the balance is adjusted to zero." Sometimes the IRS will agree with the accountant and adjust the balance due. Other times, if there is a good reason, the IRS may waive the penalties. And, of course, there may be times when you have to pay everything the IRS claims is owed. Most importantly, do not simply write the check before discussing your options with a qualified Certified Public Accountant.
8.FAQs. Wonder what tax laws have changed this year? What age your kids must be before you can no longer declare them? If you can claim a college student as a dependent? Check out the Frequently Asked Questions page of IRS.Gov. Again, remember that the online tax services and Certified Public Accountants update their software annually to reflect changes in the law. So if you are using one of these services, it's much more time efficient than trying to read all of the fine print on your own.
Charity, Education, Health Savings Accounts and IRAs -- Tax Deduction Paradise! Enjoy...