By William J. Lynott
Last-minute savings on your 2011 income tax bill
The filing deadline for 2011 federal income taxes is not far off, but you still have time to make sure you’ve done everything you can to keep Uncle Sam’s paws off as much of your money as possible. Earning money in a professional practice is tough enough these days, and keeping it is even harder. Here are some last-minute ways to reduce your 2011 income tax bill:
SAVE MORE FOR RETIREMENT
One of the most important tax-savings steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plans. If you haven’t done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2011, you may put as much as $16,500 into a 401(k), 403(b) or 457 plan. If you’re over age 50, you may add an additional $5,500.
Every dollar you contribute means you will pay less income tax. Except for the new Roth IRA, all contributions to tax-deferred retirement plans are tax deductible in the tax year for which you make your contribution.
If you’re in the 28 percent tax bracket, for every $100 you contribute, your federal tax bill decreases by $28. Your total savings will actually be higher when you factor in savings on state taxes. Obviously, the higher your tax bracket, the higher your savings.
This is “found” money. Whatever you do, don’t walk away from it. Of course many people are not in a position to contribute the legal maximum, especially in this economy. If you can’t come up with the maximum, bump up your contribution as much as you possibly can. It may seem painful now, but you’ll benefit greatly in the future.
You must make your contributions no later than the time you file your 2011 return, and you may make deposits for 2011 only in accounts that you opened prior to Dec. 31, 2011.
DON’T FORGET SALES TAXES
Perhaps you bought a new table this year. Do you still have records of these large purchases made in 2011? You still have a choice of deducting either your state and local income taxes or state and local sales taxes, but not both.
If you live in a high tax state, such as Ohio or Massachusetts, you’re probably better off continuing to take the deduction for state income and property taxes. However, for residents of states like Florida and Texas, which have no separate income tax, the sales tax deduction can significantly reduce federal taxable income.
Can’t find your sales receipts? Not to worry—the I.R.S. has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. You’ll find the tables on the I.R.S. website irs.gov. Type “estimated state sales tax” in the search box.
HAVE KIDS IN COLLEGE?
If you’re practicing and also dishing out big bucks for college tuition, you might be able to get some of them back.
There are two education credits and a tuition deduction for which you may be eligible. (A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. If you’re in the 28 percent bracket, your $100 deduction will reduce what you owe by $28 [$100 x 0.28]).
The Hope credit is for taxpayers whose children (or themselves) are in their freshman or sophomore years in college. It offers a maximum tax credit of up to $1,800 for 2011. The Lifetime Learning Credit offers the possibility of a credit of up to 20 percent of the first $10,000 in tuition you pay, for a maximum credit of $2,000. 2011 may be the last year for this credit.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction.
Details and earnings limitations on education deductions and credits are complex, so it’s best to check with your tax advisor to see if you are eligible.
And don’t forget the Child Tax Credit which has been extended through 2011–2012. The Child Tax Credit allows you to claim a maximum $1,000 per qualified child. Remember, a tax credit is a direct subtraction from your actual taxes owed, which is much more valuable than a deduction.
OFTEN OVERLOOKED DEDUCTIONS
Many easily overlooked miscellaneous expenses are deductible as long as they add up to at least 2 percent of your adjusted gross income. Grouping them together can help you meet the 2 percent threshold. Here are some miscellaneous items you may have overlooked:
n Tax Preparation Costs
You may claim the cost of personal income tax preparation software or books as a miscellaneous deduction. If you hire a professional tax preparer to do your taxes, you may also be able to deduct the fee.
n Other IRS-Approved Deductions
If applicable, you should make sure that you take full advantage of the following IRS-
n Interest from Home Refinancing
If you refinanced a mortgage and still have unamortized points left to deduct from an earlier refinancing, you can claim all the unamortized points from the earlier refinancing as deductible interest.
n Purchases Financed By Loans or Credit Cards
If you made large purchases on your credit card or with a loan, don’t forget to deduct any interest costs involved.
Use caution when taking advantage of miscellaneous deductions. Document everything. If the I.R.S. decides to question you about any of your deductions, they will want to see all of your pertinent receipts and statements. Self-employed professionals such as chiropractors are a favorite audit target for the I.R.S.
Check your math and be sure to get the correct tax amount from the tax table if you use it. The other numbers to be most careful about are identification numbers—usually Social Security numbers—for each person listed on the return.
The I.R.S. toll-free help line at 1-800-829-1040 is available from 7 a.m. to 10 p.m. weekdays. Their website (irs.gov) has interactive tax aids, forms and publications for downloading.
If you’re unable to complete your return on time, you may request an automatic extension to Aug. 15. Form 4868 has details. There is also a special toll-free number for requesting an extension by phone. Call 1-888-796-1074 before the regular filing deadline.
An extension gives extra time for filing only, not for paying any balance due. Interest will apply to any tax not paid by the April deadline, plus a late payment penalty if you pay less than 90 percent of the total tax on time.
When you mail your return, be sure to get it to your local post office before the last pickup of the day. Some post offices stay open late to accept returns for a deadline day postmark. You may also use one of the designated private delivery services to meet the filing deadline. The four companies involved—Airborne Express, DHL Worldwide Express, Federal Express and United Parcel Service—can provide details on which of their services qualify and how to get proof of timely filing.
Keeping your personal income tax to the legal minimum requires a little planning and effort on your part but the time you spend chipping away at your taxes may be among the most profitable investments you’ll make this year.
This article was produced for informational purposes only and not as specific tax advice. For more information, you should contact your tax advisor.