"There is nothing sinister in arranging one's affairs as to keep taxes as low as possible...for nobody owes any public duty to pay more than the law demands."

--Judge Learned Hand

Home	Location	Tax News	Tax Changes	Small Business	Tax Planning	Tax Links

What's an EA?	Home Office	Divorce	Community Property	Saving Records	Can't Pay IRS?	IRS Problems?

Tax Planning

Tax time doesn’t start in January and end on April 15th. Easing your tax bite and making the most of the available advantages is a year round effort – start making changes now.

Federal Income Tax Saving Strategies
Maintain Smart Tax Records
Bunch your Deductions
Alternative minimum tax (AMT)
Converted IRA lost money?
Need very short term money?
Maximize your IRA contributions.
Exceptions to Early Withdrawal Penalties before Age 59 ½.
Adjustment for student loan interest.
Dependent care credit.
Education Credits.
Property tax deduction for second homes and/or investment property.

Federal Income Tax Saving Strategies: Funny thing about taxes is that most people approach them backward. They sit down between January 1st and April 15th and start sifting through the records of things they have already done, looking for ways to save. By then it is too late for most tax saving opportunities. A smarter approach is to look ahead. Chart a year round tax strategy that will yield the lowest possible tax bill come April 15th. Filling out the return should be the last step.

Top of Page

Maintain tax smart records. Keeping track of your deductible expenses can save you a shoe boxful of tax dollars and provides proof of your deductions if you’re ever audited.

In 2010 you can deduct 51 cents per mile for business travel, 14 cents per mile for volunteer, and 19 cents per mile for moving or medical mileage. The volunteer mileage comes right off your taxes like a cash contribution. Keep mileage logs in your vehicles and it takes less than a minute per trip to write down the odometer readings.

If you entertain for business, just mark the person entertained and business purpose on the receipt. The date, place and amount is already on the receipt. You can write off 50% of these expenses.

Keep track of all improvements to your home. This affects your basis. You may or may not need this information. If for some reason the home isn’t your principal residence (rental or more than one home), haven’t owned and lived in the home for 2 of the past 5 years, or you make a huge profit ($250,000 if single), these receipts will save you tax dollars.

Top of Page

Bunch your deductions. You may find itemizing your deductions every other year can save you tax dollars. With the standard deduction increase (in 2010, $11,400 for married filing jointly; $5700 for singles; in 2011, $11,600 MFJ and $5800 Single), more people will not be able to save much if any by itemizing. Tax Savvy frequently recommends bunching deductions.

1. In Texas, your property taxes are due by January 31st. Plan to put two years of property taxes into one tax year. For example, pay your 2010 property taxes in January of 2011 and then pay your 2011 taxes in December 2011, if 2011 is your itemizing year.

2. Your Jan. 1 mortgage payment really represents interest for the month of December, so make the payment by the 31st. By accelerating the payment, you get an additional deduction this tax year for the interest paid. Make sure you don't cut it too close in making the early payment. You want the lender to have plenty of time to credit it to your current year payment amount. The added interest will show up on the annual 1098 statement you'll get from your lender in late January detailing your deductible mortgage activity. This gives you 13 mortgage interest amounts to deduct in the year you itemize and 11 payments in the year you take the standard deduction.

3. Increase your charitable contributions for the year you plan to itemize. Try to move as many deductions to the itemizing year as possible. You can deduct 14 cents per mile for all qualified charitable travel. Not only that, you can deduct your out-of-pocket expenses when you are serving a qualified organization (for example, Scout leaders can deduct the cost of uniforms). But what you can't deduct is the value of your time you donate to a charitable cause.

4. Medical expenses are of no use until they total more than 7.5 percent of your adjusted gross income. Plan your medical expenses as much as possible to take advantage of any tax saving amounts in the years you itemize. Buy medications, contacts, etc. early, time the yearly visits in January and December like the property tax payments. Plan the big non critical items like braces.

Miscellaneous deductions must surpass 2 percent of your adjusted gross income. If you have enough to make the cut off, try to lump some of next years expenses in too. Here is a list of some things to consider:

* Dues to chambers of commerce, professional societies and unions
* Education that is employment related
* Job-search expenses in your present occupation
* Legal fees related to doing or keeping your job
* Licenses and regulatory fees, as well as occupational taxes
* Malpractice insurance premiums
* Medical examinations required by an employer
* Passport for a business trip
* Subscriptions to professional journals and trade magazines related to your work
* Tools and supplies used in your work
* Travel, transportation, entertainment and gift expenses related to your work
* Work clothes and uniforms and their upkeep costs

Rotating the itemizing and standard deductions each year can save you over a thousand tax dollars.

Top of Page

Alternative minimum tax (AMT) is a whole new tax system. You need to figure your taxes using ATM rules if you make more than $75,000 and have deductions for several children, interest deductions from second mortgages, capital gains, high state and local taxes, or incentive stock options. If it turns out you should have paid the AMT but didn't, you will owe the back taxes plus interest or penalty. See LINK to AMT page for more information.

Top of Page

Converted IRA lost money? If you switched an IRA to a Roth this year and the Roth has lost value, unconvert the IRA by Dec. 31 and you won’t owe any tax on the current year conversion. Plus, you can reconvert the money to a Roth IRA early next year if you still qualify. But keep in mind you’re required to wait at least 31 days after the original conversion to unconvert. Assuming the market is still down and your tax situation remains about the same, you will pay less tax on the conversion next year if you use this strategy.

But you cannot keep switching back and forth between an IRA and a Roth during the year. You are allowed only one conversion of an IRA to a Roth each year.

Top of Page

Need very short term money? You can't borrow against an IRA, but once a year you can withdraw the money from your IRA account as long as you redeposit the money in the account or in a new IRA account within 60 days.

Top of Page

Maximize your IRA contributions. Did you know that alimony received is considered "earned income" for IRA contribution purposes? Or if your spouse is a homemaker with no W-2 earned income, you might still be able to make a full $5,000 IRA contribution for him/her in 2011? Or more if 50 years old or more. These contributions may or may not be deductible, depending on your individual circumstances.

Top of Page

Exceptions to Early Withdrawal Penalties before Age 59 ½. It is never wise to use your retirement money but sometimes you have to. With some planning, you might not have to pay the 10% early withdrawal penalty. If any of these apply to you, make sure you investigate the details further to see if you qualify.

1.	Distribution made to an employee who has attained age 55 and separated from service (not applicable to IRAs).
2.	Distribution is part of a scheduled series of substantially equal periodic payments made over the life expectancy of the participant and the beneficiary.
3.	Distribution made due to disability.
4.	Distribution made after death of employee.
5.	Distribution used to pay medical expenses to the extent such expenses exceed 7.5% of AGI.
6.	Distribution made to an alternate payee pursuant to a qualified domestic relations order.
7.	Distributions from IRAs to pay for health insurance premiums for certain unemployed individuals.
8.	Distributions from IRAs to pay qualified higher education expenses of the taxpayer, spouse, child or grandchild.
9.	Distributions from IRAs for first time home purchases (no home ownership in prior two years). Distribution limited to $10,000 lifetime maximum.
10.	Distributions from qualified plans and IRAs due to an IRS levy on the plan or IRA.

Top of Page

Adjustment for student loan interest. Did you pay interest on a student loan this year? If so, you might be able to reduce your income by the amount of the interest that you paid, to a maximum adjustment of $2,500. The 60 month rule was lifted and your interest may qualify for the deduction regardless of how long you've been paying on your loans. And you do not have to itemize your deduction on Schedule A to claim the adjustment for student loan interest paid.

Top of Page

Dependent care credit. Mom and Dad both work and had to pay somebody to watch Junior during work hours? Well, if Junior is under age 13, Mom and Dad could qualify for the dependent care credit. How about if Mom works but Dad is a full-time student with no earned income? The dependent care credit could still be available. Don't forget about a spouse who is disabled and can't care for him/herself. Even if there are no children involved, the dependent care credit might still be available.

Top of Page

Education Credits. American Opportunity education credit is available for 2009-2012 tax years.

A credit is almost always preferable to a deduction, because a credit reduces taxes owed, while a deduction only reduces taxable income. The maximum amount of the American Opportunity credit is $2,500 (up from a maximum of $1,800 under the Hope credit). The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000.

The maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more. While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity credit is available for up to four years (undergraduate studies).

Under the Hope credit, qualifying expenses included just tuition and fees required for the student's enrollment. Textbooks were excluded, despite their escalating cost. The American Opportunity credit expands the list of qualifying expenses to include textbooks.

The Hope credit was nonrefundable. It could reduce your regular tax bill to zero but could not result in a refund. This meant that if a family didn't owe any tax it couldn't benefit from the credit, prompting critics to argue that the credit was unavailable to the families who needed it most. The American Opportunity credit addresses this criticism by providing that 40% of the credit is refundable. This means that someone who would qualify for the maximum credit of $2,500, but has no tax liability to offset that credit, would qualify for a refund of $1,000 (40% of $2,500).

The Hope credit wasn't available to someone with more than moderate income. Under the credit's “phaseout” provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers). Taxpayers with somewhat higher incomes can qualify for the American Opportunity credit, as the phaseout of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

We still have the Tuition and Fess deduction or Lifetime Learning credit for students not qualifiying for the American Opportuntiy credit (like Grad School).

Top of Page

Property tax deduction for second homes and/or investment property. Many people are under the impression that property tax deductions are available only for your primary residence. Not true. Property taxes are deductible for all applicable real property - third or fourth homes, vacant lots, raw land, etc. But if you have rental properties, different rules apply.

Top of Page

Tax Savvy
401-B South Birmingham Street
Wylie, TX 75098
972-442-5226
CheriPullen@TaxSavvy.com

The information you obtain at this site is not, nor is it intended to be, tax advice. You should consult a licensed tax professional for individual advice regarding your own situation.