If you’re in the habit of making New Year’s Resolutions, one that you might consider for the coming year is this: “I resolve not to pay more in taxes than I need to.”
When it comes to keeping a resolution, this one might seem like a no-brainer. In fact, however, making sure you don’t overpay your taxes requires some planning, research, and attention to detail. Here are some factors to keep in mind, both as you prepare your tax return for 2009 and as you plan for 2010:
1. As always, pay attention to the basics. Make sure you claim the right number of personal exemptions, figure your taxes at the correct rate, and claim all the deductions to which you are entitled. Some of these might include the child tax credit, education expenses, state taxes, or charitable contributions.
2. If you haven’t contributed the maximum to your IRA, you can still make contributions. If you don’t have an IRA, you have until April 15 of 2010 to open one for 2009.
3. Make sure you aren’t having too much withheld from your paycheck. A large income tax refund isn’t a “bonus;” it’s an interest-free loan to Uncle Sam. Put the same money into an IRA or savings account instead and let it earn interest for you.
4. If you had any investment losses in 2008, some of those amounts may carry over into 2009. Even if you usually prepare your own tax returns, it might be wise to consult a qualified tax professional about reporting investment losses.
5. Make sure you are taking advantage of any special credits or short-term tax provisions that apply to you. As an example, if you made any energy-saving improvements to your house such as a new furnace or new windows, you may qualify for an energy tax credit. Another example is the first-time homebuyer credit, which has been extended until April 30, 2010. Some of its provisions have been changed, including the addition of a “long-term resident” credit, so check it out if you are considering buying or selling a home.
6. If you can, spend some time on the IRS website to find out about current tax provisions. A good place to start is Publication 17, Your Federal Income Tax, which summarizes current tax rates, credits, and other information. You can read this information online or download it. If you don’t have Internet access, you can get a free printed copy of Publication 17 by calling 1-800-TAX-FORM (829-3676).
7. If your financial affairs are more complex, there are additional ways to save on taxes. One strategy is to arrange to receive more of your income from sources that are taxed at lower rates. Long-term capital gains, for example, are currently taxed at lower rates than ordinary income. These rates will almost certainly be going up in 2011, so if you have investments, it would be wise to discuss tax strategies with your investment advisor.
8. If you own a small business, make sure you deduct all your legitimate business expenses. These might include use of your car, an office in your home, or travel expenses. You also might consider reducing FICA deductions by taking some of the income from your business as dividends rather than a salary. If you do this, you will reduce your future Social Security income, so it’s important to invest the tax savings for your retirement.
Please keep in mind that these ideas are merely possibilities to consider. I strongly recommend that you consult a tax preparer, preferably a CPA, for tax advice tailored to your own situation.