For the most part, you have certain retirement accounts, we have moved beyond the point where you can get more credits and deductions for tax year 2010. If you didn’t spend it in 2010, you can’t spend it now and claim it on those taxes. But you can get ready for 2011. One of the best ways to improve your tax efficiency is to think ahead and do a little tax planning for the coming year. Here are a few things to keep in mind for the coming year:
You Should Have a Little Extra in Your Paycheck
The tax package passed at the end of 2011 included a payroll tax cut for employees. So, on the employee side of payroll taxes, there is 2% reduction, leading to a higher paycheck. The maximum is $2,136 per worker. It is assumed that for the self-employed, this is also available, but only on the portion of payroll taxes that you pay as an employee (no reduction in the amount you pay on the employer side).
Converting to a Roth IRA
Last year was the year of the conversion from a traditional IRA to a Roth IRA. Many people took advantage of the fact that for 2010, the income limits on conversions were lifted. You probably owe taxes, but you can defer until tax years 2011 and 2012. The income limit on converting to Roth IRAs has been permanently lifted, so you can still convert if you want to. However, the tax deferral option is gone, so if you convert this year, you will have to pay all the taxes you owe for 2011.
If you made the conversion in 2010, and regret it, you can recharacterize your Roth IRA back to a traditional IRA.
Tax Credits for Energy Efficiency Home Improvements
The really nice tax credits for energy efficiency home improvements mostly expired at the end of 2010. (You can still get the 30% credit – no cap – on big green home improvements like installing solar panels, wind turbines or geothermal power.) The new tax credit for energy efficient home improvements has caps on specific items, as well as caps your tax credits on small improvements (insulation, energy efficient windows, HVAC, etc.) to $500 for your lifetime. So if you’ve already taken $500 in credits, you are done.
Tax Credit for Education
A renewal to the American Opportunity Tax Credit was made, so you are eligible for up to $2,500 in education expenses for this year — and next year, too. However, there are restrictions to the credit. You can check to see if you are eligible.
Evergreen Tax Considerations
Of course, there are a few tax breaks that you should be thinking about this year, and every year. Plan for deductions related mortgage interest and points paid on refinancing. Keep receipts and documentation of goods and money donated to charity. You can even get a mileage deduction when you travel on behalf of working for charity, so note this information.
Other great tax breaks include those related to your home office and home business. You can also get tax breaks for medical expenses you pay out of pocket. Document your co-pays, prescriptions, and other out of pocket expenses that the insurance company doesn’t cover. Then, if it amounts to 7.5% of your AGI (it’ll be 10% in 2013), you can deduct it. Think about what you might spend your money on this year, and then prepare yourself to properly document it so that you can reduce your tax liability.
This post was included in the Carnival of Taxes
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.