Photo by Tim Bradley/Getty Images
Here are 10 ways to get a break:
1. IRA Charity. People 70 1/2 or older can donate up to $100,000 per person annually to the charity of their choice from their IRA and pay no income tax on the money. Originally created as an economic stimulus measure, it applies to those who must take required minimum distributions from their IRAs.
So instead of taking the money out and paying federal and state taxes on it, you send the money directly to a qualified charitable institution. Just remember that Uncle Sam won't let you also claim a charitable deduction for the contribution.
Consult a financial adviser to figure out whether this makes sense for you — it may depend on the particulars of your pocketbook.
2. Medical expenses. These are always worth monitoring. If your total medical bills exceed 7.5 percent of your adjusted gross income (your income minus certain expenses), you can deduct the amount above that threshold.
You're allowed to count a surprising number of products and services: acupuncture, artificial limbs, improvements to your home made for medical reasons, contact lenses, crutches, dental treatment, eyeglasses, hearing aids, insurance premiums for long-term care and Medicare supplements, nursing services, oxygen, therapy and wheelchairs.
Photo by Mike Kemp/Rubberball/Corbis
Even costs of "medical vacations" for surgery in a foreign country may be deductible, says Julian Block, a tax attorney in Larchmont, N.Y., and author of several books on tax preparation.
If your medical expenses exceed 7.5 percent of your gross adjusted income, "you can deduct $50 a day for lodging for you and $50 for your travel companion," he explains. "These expenses are often overlooked." Consult IRS publication 502 for details and a complete list.
If you're close to qualifying for the medical expenses break, it might make sense to go ahead this year with any costly elective medical expense you're contemplating, before any radical changes to the tax code are made.
3. Roth IRAs. Converting your traditional IRA to a Roth may make sense. Unlike regular IRAs, Roths permit tax-free withdrawals. But you've got to pay tax on any gains incurred when you convert.
Nearly every mutual fund or brokerage firm offers an online conversion calculator. Run the numbers to estimate whether the move is worthwhile for you.
4. Miscellaneous deductions. If you itemize on Schedule A of your 1040 — and don't take a standard deduction — there are a bevy of expenses you may be able to deduct. Grab your receipts and see if they exceed 2 percent of your adjusted gross income. If they do, you've got a deduction for the amount above that level.
Here are some popular items to tally up: Dues to professional societies; home office expenses (in an area used exclusively for your business); subscriptions to trade journals and professional publications; job-search expenses; work-related transportation, meals and lodging; and work-related education. See IRS Publication 529 for more details.
For IRAs, you have until April 17 to make contributions. Keep in mind that Roth IRAs and Roth 401(k)s tax your contributions, but withdrawals are tax-free. If you think taxes are going up — as many pundits predict — a Roth might be a good move.
6. Capital gains and losses. If you have a stock that's risen in value, this might be a good year to take the gain and get taxed at the 15 percent rate for long-term (held more than a year). The Obama administration has discussed raising the capital gains rate to 20 percent.
And do you have some losers you want to prune from your portfolio? For losses that exceed your gains, you can claim a deduction of up to $3,000 annually — $1,500 for married taxpayers filing separately.
7. Mutual funds. If you're thinking of buying into a mutual fund before the end of the year, be aware of the tax liability. Funds pay year-end distributions in December, so you may get hit with taxes on a fund you've only held for a few weeks. This is not a problem, though, if you make the purchase within a qualified retirement plan such as an IRA.
8. Energy savings. Making certain energy-related improvements to your home will cut your tax bill. For instance, you can get a credit of 10 percent of the material cost of qualifying types of insulation in your primary home, up to $500. Some of the energy credits, like that one, expire at the end of 2011. Get more info about 2011 energy credits.
9. Receipts and bills. Keep them. Gather them now, not next April, so you or your tax planner can get a heads up before the year ends. For a referral for a fee-only financial planner, contact the National Association of Personal Financial Advisors.
10. Direct deposit. If you're due a refund, sign up for direct deposit. You may not be saving on your taxes, but you'll have the satisfaction of getting your money faster.
For general tax information, the IRS has a number of free guides and forms online that can help. Also, check out AARP Foundation Tax-Aide, a free program that offers services to low and moderate income taxpayers, with special attention to those 60 and older.
You may also like: Get more tax tips. >>
John F. Wasik is a personal finance columnist for Reuters and the author of The Cul-de-Sac Syndrome and 12 other books.
Discounts & Benefits
Next ArticleRead This