More Tax Planning Tips

It's always the right time to be thinking about new tax-savings ideas.  Whether it's the start of a new year, or you're up against the April income tax-filing deadline, there's usually something you can do to help reduce your tax bill.  When it comes to taxes, having a plan can help maximize those savings.

Tax Planning Time

Let's face it; no one really likes paying income taxes.  We all understand that taxes help pay for essential services that we all enjoy, so many of us feel good about paying our fair share.  But for most of us, that's where it stops.  The thought of paying too much income tax is not a pleasant one.  That's where a good plan comes into play.

Developing a Tax Plan

Sometimes we're lucky and good fortune just seems to come our way.  But when it comes to paying income taxes, it's a good idea to map out a plan.  Doing so should help us reduce our total tax bill.  Creating a plan and sticking to it, will prevent a scramble for last minute tax savings tips later on.
 
In this article, we're going to try to legally shelter some of your income from taxes.  We're going to do that by listing some of the biggest tax-savings programs available today.  The tips we're going to talk about range from retirement savings strategies through medical expenses and college savings plans.

Tax Tip #1 - Employee Retirement Savings

Employee supplemental retirement plans are an extremely effective way to reduce your taxes.  The three most common plans include the 403b, 401k and 457b.  You'll also find more progressive employers offering choices of Roth 403b and Roth 401k accounts too.

There are two big benefits you get by contributing to these plans:

• Your contributions can reduce your taxable income.  For example, if you're in the 28% tax bracket, and you contribute $10,000 to your account, then you've saved $2,800 in income taxes.
• Employers often match employee contributions.  That means if your employer matches $0.50 for every dollar you contribute to your fund, then you have an instant return on your investment of 50%.

If you want to find out more information on this tax saving topic, take a look at our articles on 401k contribution rules and 403b contribution rules.

Tax Tip #2 - Traditional and Roth IRAs

If your employer doesn't offer a retirement plan, then chances are you're eligible to contribute to a Roth IRA or a Traditional IRA plan.  With a Roth IRA, you're making after-tax contributions to an account that provides you with tax-free income at retirement.  With a Traditional IRA, you may qualify to place money in your account and claim a tax deduction on your income tax return.

We have a lot of up-to-date information on contributing to a Traditional IRA as well as contributing to a Roth.  If you're not sure which type of account to fund, then take a look at our article on Investing in Retirement Accounts.

Tax Tip #3 - Open a Keogh Account

If you have self-employment income, then you might be able to increase your retirement contributions by opening a Keogh account.  The contribution limits on a Keogh are quite high.  In 2011 the limit is $49,000 or 100% of your eligible compensation, whichever is less.  The maximum deductible contribution is limited to 25% of your compensation.

For those with self employment income, the Keogh offers another great way to save on your income taxes today.

Tax Tip #4 - Donate Stock to a Charity

Here's a tip if you're feeling charitable and you've been lucky in the stock market.  If you have stock that's grown in value, and you've held onto that stock for at least a year, then you might want to consider donating the stock to charity.

By donating the stock, you avoid paying taxes on the stock's appreciation in value.  Even better, you can deduct the full value of the stock on your income taxes as a charitable donation.  All of the larger charities should be familiar with this type of transaction, and they're often more than happy to help you with all of the paperwork.

This stock donation rule holds true as long as you held the stock for at least a year and your contribution deduction does not exceed 30% of your adjusted gross income.

Tax Tip #5 - Take a Credit

If you've filled out a tax return before, then you probably know that a tax credit is much more valuable than a tax deduction.  For example, if you're in the 28% tax bracket, then a deductible expense of $100 is worth $28.  On the other hand a tax credit of $100 means you're getting $100 more in your tax refund check.

There are many different tax credits, but here is a list of the most common:

• Child Tax Credit - For the tax year 2010, you may be able to claim a child tax credit of $1,000 for each qualifying child.  A qualifying child is one that was under the age of 17 at the end of 2010, and is a child that is your own, or that of your brother or sister and is cared by you as your own child.  Foster children are also eligible, and all these children must be a U.S. citizen or resident.  The child tax credit is phased out if your adjusted gross income is above a certain level.
• American Opportunity Credit - The American Opportunity credit replaces the Hope Credit in 2010.  Eligible taxpayers can take a credit of $2,500 for each eligible student.  The credit is limited by your income, and phases out for single taxpayers with a modified adjusted gross income in excess of $90,000 and married couples filing joint returns with MAGI over $180,000.
• Lifetime Learning Credit - The Lifetime Learning Credit is 20% of the first $10,000 you paid for qualifying tuition and related expenses each year.  The maximum credit for 2010 is $2,000.  Expenses for graduate and undergraduate work are eligible.  You cannot claim a Lifetime Learning Credit if your AGI is over $60,000 or $120,000 in the case of jointly filed returns.
• Child and Dependent Care Credit - If you care for a dependent that is under the age of 13, or for other dependents that are not able to care for themselves, then you may be eligible for the child and dependent care credit.  This credit can be up to 35% of the expenses associated with the care of these individuals.  To qualify, you must satisfy all eight of the IRS tests.

To find out more information on this tax tip, check out our article on Tax Credits.

Tax Tip #6 - Pay Expenses Pretax

If your employer offers you a flexible healthcare spending account, then you can use pretax dollars to pay for medical premiums as well as out-of-pocket healthcare costs.  Examples of out of pocket costs include copayments and deductibles as well as coinsurance amounts.  You can also deduct some childcare expenses in addition to expenses related to prescription medications.

The only downside of these flexible accounts is the "use it or lose it" provision.  That means money not used during the year is forfeited.  If you're considering funding one of these accounts, then make sure you run through some health care cost calculations so you're not over-funding the account.

Tax Tip #7 - Save for College

If you have children, and you want to send them off to college one day, then you might want to consider saving for college as part of your tax planning strategy.  Investing in a state sponsored 529 plan makes a lot of sense, since many states allow you to deduct all or a large part of your contributions on your state income tax return.

In addition, the earnings on 529 plans grow on a tax-deferred basis.  If the money is eventually used to pay for higher education expenses, then those earnings may also be free of federal and state income taxes.

If the thought of saving for college and saving on income taxes sounds good to you, then you also want to think about contributing to a Coverdell ESA.  There are no limits on the number of separate Coverdell accounts that can be established for a beneficiary, but the total of all contributions to a beneficiary cannot exceed $2,000 in a single tax year.

While the contributions to a Coverdell ESA are not tax deductible, the beneficiary does not owe taxes on the distributions as long as they are less than their qualified education expenses.

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