With only days left in 2010, experts from Fort Bend area H&R Block affiliates are offering a number of tips to help taxpayers lower their liability before the new tax year begins.
HAPPY NEW (TAX) YEAR – With only days left in the year, experts are encouraging taxpayers to consider ways to reduce their income tax liability.
“Lawmakers will be the ones making tax law decisions, but taxpayers can’t afford to ignore opportunities to save on their tax bill and make positive changes before Jan. 1 to improve their overall financial health,” Marian Clarke, master tax adviser at H&R Block, said.
Clarke recommended taxpayers consider some “healthy, wealthy and wise” actions now to decrease their 2010 tax bill.
“Healthy actions” include using health savings and flexible spending accounts with tax benefits in mind. Taxpayers with health savings accounts, even though the money in them rolls over into the new plan year, have a last-minute opportunity to use money in the account to stock up on over-the-counter drugs.
Starting in 2011, those funds no longer can be used to buy over-the-counter drugs – with the exception of insulin – without a prescription. The same change applied to flexible spending accounts.
Taxpayers with flexible savings accounts should spend all the money in these accounts before Jan. 1, 2011 (before March 31, 2011 if the plan provides a grace period) or be subject to the “use it or lose it” provision.
Some “wealthy” actions taxpayers can consider include reviewing their income and deductions, Clarke said.
Taxpayers with a large net capital gain in 2010 could reduce their tax liability by selling stock that will generate a loss before Dec. 31.
Taxpayers who have not contributed the maximum to their 401(k) can also consider increasing contributions for the remainder of the year; contributions are made pre-tax, which reduces taxable income and potentially the overall tax bill.
Taxpayers eligible to deduct IRA contributions can make traditional IRA contributions to decrease 2010 income until April 18, 2011, and thus reduce tax liability on 2010 tax returns.
Another option is converting to a Roth IRA by Dec. 31 and pay half the taxes on the resulting income when filing the 2011 return and the other half when filing the 2012 return. Unless taxpayers elect otherwise, they will recognize the income in two installments.
“Wise” actions taxpayers should consider include getting early access to W-2 forms, claim homebuyer credits and make smart higher education payment decisions.
By using a W-2 early access service, taxpayers can get access to W-2s before the Feb. 1 distribution deadline. Approximately 70 million taxpayers whose employers are among the 185,000 companies participating in the early access service can file their tax returns sooner and get refunds up to three weeks faster using the W-2 early access service.
For eligible 2010 purchases, the homebuyer tax credit can be claimed on 2009 or 2010 tax returns. This gives taxpayers the option of filing an amended tax return now for the 2009 tax year and receiving their money earlier than waiting to claim the credit on their 2010 tax return when filing in 2011.
Additionally, those who have not taken full advantage of the American Opportunity Credit should consider paying spring college tuition before Dec. 31 to benefit from the tax break on their 2010 returns. Also, taxpayers expecting a pay raise in 2011 may want to pre-pay their tuition if they anticipate their new income level phasing out their eligibility for education credits.
Going green can also have tax benefits since home energy-efficiency improvements are eligible for a tax credit of 30 percent of the cost, with a maximum of $1,500 claimed for 2009 and 2010 combined. This includes external windows and doors, insulation, roofing, HVAC and non-solar water heaters meeting specific energy guidelines.
Also, taxpayers can go green in their next car purchase and take advantage of a tax break. The Hybrid Vehicle Credit for buying a gasoline/electric hybrid or qualifying clean diesel vehicle may be more than $2,000, depending on the vehicle.
Good Stuff!