For many, April 15 is the chosen date to start thinking about tax planning, but by then it's too late - four months and 15 days too late. Tax planning is a game plan, most effective when implemented throughout the year. And 2010 is an especially important year to plan considering the Bush Tax Cuts are set to expire and what changes health care reform may bring to the tax code.
To help you game plan, we've put together these five tax moves to take advantage of changing tax laws and to better prepare for the upcoming tax season. Implement these now, and you could save a bundle on April 15.
Assess Capital Gains - The current long-term capital gains tax rate, with some exceptions, is either 0 percent or 15 percent depending on what ordinary income tax rate you fall into. But in 2011, these rates increase to 10 percent and 20 percent. That means if you have some investments that have done well, you may want to consider selling them this year to take advantage of the lower tax rates. If you are currently within the 0 percent long-term capital gains rate, it's probably an easy decision. But for those in the 15 percent bracket, saving 5 percent over next year's higher rate is significant also. Of course, an investment's tax consequences are just one factor to consider when deciding whether to sell, so consult with your financial adviser first.
Make Money Now - When the Bush Tax Cuts expire in 2011 some of the higher income tax brackets will get even higher. The top two rates for the 2010 federal income tax brackets are 33 percent and 35 percent, which will increase to 36 percent and 39.6 percent in 2011. Congress will decide later this year what effect these changes will have on lower tax brackets (tax rates could decrease for individuals earning below $250k according to President Obama's proposed budget), but the lower tax brackets are set to increase as well if no change is made. If you fall into a rising tax bracket, and are a small business owner or independent contractor, you may want to accelerate income into 2010 if at all possible. You also may want to consider shifting income by hiring your children or other family members who are in a lower tax bracket. This may also be a strategy for you to have your child or family member deduct their education expenses, where you may have not been able to because your income was too high.
Go Green (Home Edition) - Several energy tax credits are set to expire this year, including a tax credit up to 30 percent of the cost ($1,500 maximum) on certain qualifying home improvements, such as roofs, water heaters, and HVAC systems. These may be extended, but to qualify this year, make sure to verify the product you want to install qualifies for the tax credit, and get the work done this year before the credit expires. There are some other energy tax credits that do not expire until 2016 but these improvements are very rare. They are presented in the link above.
Make a Non-Cash Charitable Donations - Year after year, this is the number one tax strategy that tax payers who itemize fail to consider. To claim the deduction, the donations must be substantiated by a written receipt that includes the name of the charity, dates and location of the donation, and a reasonably detailed description of the property donated. If the value of the donated items is less than $250, a receipt is not required. For items with a total value more than $500, you will need to file Form 8283 and you may need a qualified appraisal for donating items or a group of items valued at more than $5000. For the Salvation Army's Non-Cash Charitable Donation Valuation Worksheet, to help you value your donations, click here.
Get Organized - Last minute tax preparation not only costs a few night's sleep, it can also cost you money. Remember you don't pay taxes on what you make; you pay taxes on what you make minus your expenses and deductions, so don't wait until tax season to organize your information. First step, buy a good accordion file. Then keep records of your taxable investments to help you calculate gains and losses. Keep your business receipts organized and separate from personal expenses (we suggest a business bank account and/or credit card). If you've made home improvements that qualify for tax credits, keep your receipts in a separate file. Staying organized takes just a few minutes a week, but it can save you a lot of headaches when it comes time to file your taxes and will reduce the risk that you'll miss a tax deduction.
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