Everyone's talking about what taxes might look like in 2011. Quit worrying about future IRS bills!
Make some tax moves now that could lower what you'll owe Uncle Sam on your 2010 income tax return. Here are five easy ones.
1. Sell appreciated assets
The long-term capital gains tax rates are at historic lows. There's a chance they soon could be at least a few, and possible many, percentage points higher. So you'll owe the Internal Revenue Service less if by Dec. 31, you sell stock and other assets that have appreciated and that you've owned for more than a year.
If you're in the 25% tax rate bracket or higher, your long-term capital gains rate is just 15%. If you're in the 15% income tax bracket or lower, you won't owe any capital gains taxes.
2. Give to your favorite charity
The holidays are the traditional time for giving. When it comes to taxes, giving to a nonprofit also could be a money-saving gift to yourself. If you itemize your deductions, you can claim your charitable donations, both of cash or goods.
Loading up on such deductible expenses is a particularly good move for taxpayers who are on the cusp of being able to itemize but aren't quite there, says Stacie Clifford Kitts, CPA and partner at Katherman Kitts & Co. in Irvine, Calif.
Higher-income individuals in particular should consider ramping up their generosity in 2010. The law limiting the total amount of itemized deductions that wealthier taxpayers can claim has been in the tax code for more than 20 years. But under the Bush tax cuts, this reduction in deductions was gradually phased out. In 2010, and this year only (at least for now), there is no itemized deduction limit for anyone. So everyone, regardless of how much they make, gets to claim all of their itemized deductions on their Schedule A.
Giving generously to a qualified charity will give you maximum bang for your tax deduction dollar. Remember, though, that increasing deductions could cost you if you end up owing under the alternative minimum tax.
3. Convert to Roth retirement accounts
Every year's a good year to add to your nest egg, but 2010 offers special tax options if you want to convert a traditional IRA to a Roth IRA. Anyone can move traditional funds into a Roth account now that the $100,000 income threshold is gone. However, taxes still will be due on any converted money that was not previously taxed.
But if you make the traditional-to-Roth IRA switch by Dec. 31, you can defer payment of the associated taxes until you file your 2011 and 2012 tax returns.
A similar situation applies to some workplace 401(k) account owners. If you have considerable funds in a 401(k) plan and want to convert some or all of your account to a designated Roth 401(k), you can now do so, says Pauline Dana-Bashian, an attorney with Pension Parameters Financial Services in New York City. As with the Roth IRA conversion, the resulting 401(k) taxes can be deferred until 2011 and 2012.
4. Embrace energy efficiency
Thanks to the last stimulus package, some relatively simple energy-efficient home improvements could help cut your utility and IRS bills. Replacing windows, doors, and heating and air conditioning systems, as well as installing new insulation, could net you a $1,500 tax credit on your 2010 tax bill. This means if you owe the IRS $2,000, your bill is trimmed to just $500.
Note, however, that if you claimed the full credit on your 2009 return, you don't get it again this tax year.
Don't limit your energy savings to your house. Some hybrid vehicles could get you another federal tax credit. True, because of the way the program phased out popular alternative fuel autos, the pickings are a bit slim. But there still are some hybrid vehicles that can save you some 2010 tax dollars as long as you buy an eligible vehicle by the end of the year.
5. Adjust your withholding
Do you intentionally get a big refund each filing season? Quit that! You're providing Uncle Sam an interest-free loan of your money.
Give your payroll administrator a new W-4 now so that your payroll withholding is more closely in line with your future IRS bill. It could even give you a few extra dollars at the end of the year to spend on holiday gifts.
If you're facing the opposite issue -- owing the IRS a lot -- adjusting your withholding now can help, too. By making a change in allowances or even adding specific extra dollar amounts to be withheld through the rest of the year, you can ensure that you won't face a possible underpayment penalty when you file your 2010 return.