As we approach the end of 2010 and look forward to the holiday season, the last thing on our mind is taxes. Most people avoid the topic like the plague unless there is potential for good news—i.e. a refund coming back from the IRS. A refund is not free money from the government. It is merely a return of the money that you have already paid; what you need to do is know how to maximize that return. In order to do so, basically, you should reduce your taxable income by taking advantage of deductions that are allowed against your gross income.
Most taxpayers are calendar year taxpayers and expenditure decisions have to be made during the course of the calendar year in order to receive any tax benefit. As with life, most of us like to wait till the last minute to sort things out; however, the next few months are excellent times to make an impact on reducing your taxable income for 2010 and maximizing your refund. As tempting as it may be, don’t wait until after December 31st to begin thinking about this!
Basically all individual filers can benefit from these commonly used strategies to minimize taxable income:
- Retirement Plan Contributions-Most individuals, whose employers offer 401(k) type deferral plans, should definitely maximize up to the allowable limits. The limit for 2010 is $16,500 for people under 50 and $22,000 for 50 and older. If you haven’t deferred enough, it might be a good idea to tell your employer to withhold more from your paycheck to reach your desired goal. It is important to note that most employers offer some matching contributions and not taking advantage of the employer match simply equates to throwing money away.Individuals not participating in employer-sponsored plans can always contribute to traditional IRAs and still qualify for a deduction, albeit lower.
- Capital Losses—As we all painfully know, the most anyone can deduct as a capital loss per year is $3,000. However, capital losses are allowed to be offset against capital gains. The recent market run up provides an opportunity to offload some profitable positions and use them to offset other loss making positions or prior year capital losses. Remember, you can always buy your favorite stock back right away as the wash sales rule doesn’t apply to gains.
- Charitable Contributions-For those who itemize or who are on the edge of itemizing, charitable donations can offer considerable tax savings. Any “in-kind” donations to the Salvation Army or Goodwill also count. A simple weekend house cleaning project can uncover several items that we bought but never used.
- Energy Efficient Improvements-If you are planning to make energy upgrades to your home, there is a 30% credit (up to $1,500) for qualified residential energy improvements. For solar heating and electric systems there is no limit on the credit and some states have additional credits.
- Miscellaneous Deductions & Organization—There are a slew of deductions including gambling losses, investment interest, IRA custodial fees, casualty losses, bad debts etc that can apply to you depending on your situation.
Given the growing complexity of tax laws, it is advisable to consult a licensed CPA who can offer customized strategies for your unique situation. As always, it is vitally important to maintain good records for all of your deductions including receipts and any other documents that will substantiate your expenditures. Scheduling a conference with your CPA in the next few weeks might be a great way to start thinking about that big refund you could get from the IRS next year.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC (www.reliancecpa.com). He can be reached at (813) 931-7258 or via email at firstname.lastname@example.org