Nobody wants to think about taxes during the holidays, but preparing for tax season now can save you money and headaches by April 15.
December is not too early to start gathering your receipts and income statements, and it's not too late to implement tax strategies and consider how changes in the laws will affect you.
"This is the month when the first of the letters with 'Important Tax Information' stamped on the front begin to arrive. You may not know what they are, but put them aside with other tax information you will need," said Lynn R. Nelson, a coordinator in Valdosta for AARP Foundation's Tax-Aide program.
Tax-Aide is a free volunteer-run assistance and preparation service for taxpayers with low and moderate incomes, particularly those age 60 and older. Last year, 687 Georgia Tax-Aide volunteers assisted with 44,800 returns with refunds over $23.3 million.
"The biggest change for Georgia taxpayers is that the Georgia Low Income Credit has been suspended. Ten percent or so of the people we do taxes for are only doing them to get this credit. There will be a lot of disappointments because of this alone," Nelson, 65, said.
Those who were eligible for the credit were Georgia residents with a federal adjusted gross income of less than $20,000 and who were not claimed as a dependent by another taxpayer.
According to the Georgia Department of Revenue, retirement income includes items such as interest, dividends, net rentals, capital gains, royalties, pensions, annuities and the first $4,000 of earned income from wages, salaries, tips or a business.
There's still time to take advantage of the federal energy credit, capital gains tax break, Roth IRA conversions and, if you're unemployed, deductions for job-hunting expenses.
"There are many tax-planning strategies," said John Thomas, 67, a Tax-Aide district coordinator in Alpharetta. He highlighted four things taxpayers can do by Dec. 31 to lower their taxes:
- Roth IRA. Starting this year, everyone with a traditional IRA will be able to convert to a Roth IRA. While contributions to traditional IRAs qualify as a tax deduction, withdrawals after age 59 1/2 are taxable. After age 70 1/2 no contributions are allowed and minimum annual withdrawals are required. With a Roth IRA, qualified contributions can be made after 70 1/2 and withdrawals are not taxed.
The amount you convert from a traditional IRA or other eligible retirement plan to a Roth IRA is typically taxable immediately. However, you are eligible for a special tax incentive if taken in 2010 only.
If you convert, you can evenly split the income generated by the conversion — and the taxes owed on it — over the next two years. You may get the most benefit if you use money outside of your IRA to pay the conversion taxes. Talk to a financial or tax adviser to see whether you would benefit from a conversion.
- Capital gains. Individuals with taxable incomes up to $34,000 and couples up to $68,000 do not have to pay long-term capital gains taxes this year, but will pay 10 percent next year. Those with higher incomes pay 15 percent this year and will pay 20 percent next year unless Congress acts this month.
- Energy credit. You can earn a tax credit of 30 percent — up to a total of $1,500 for 2009 and 2010 — of the cost of energy-efficient furnaces, water heaters, central air conditioners, insulation, windows and doors. The credit drops to 10 percent or up to $500 after 2010.
- Job-hunting deductions. If you're unemployed and looking for work, you may be able to deduct your job-search expenses. Keep records of résumé printing costs, career-counseling fees and travel expenses for interviews. You can deduct these costs as long as the total exceeds 2 percent of your adjusted gross income and you are searching for employment in the same line of work.
For more information about the AARP Tax-Aide program, call 1-888-227-7669 toll-free after Jan. 15; use this online locator tool to find the Tax-Aide location nearest you.
Don O'Briant is a freelance writer in Atlanta.