April 15th has passed and if you are like me, you have filed your tax return and are breathing a sigh of relief. However, before you put your tax files away, take a little time to start planning for your 2010 taxes. By taking a little time now, you may be better able to manage your tax burden and save some tax dollars. When it comes to taxes, procrastination is your biggest enemy.
Step No. 1—Major family changes in 2010
What major changes might take place in your family during 2010 that may affect your tax situation?
•Will you earn significantly more or less money during 2010?
•Will your family have a baby or adopt a child during the year?
•Will you be getting married or divorced during the year?
•Will a family member be starting a career, quitting work or retiring?
•Will you be buying or selling a home?
•Will you be claiming additional or fewer dependents?
•Do you anticipate realized gains or losses on your investments?
Step No. 2—Estimate Your 2010 income
Start with your 2009 tax return, your most recent pay stubs and your investment account statements. Make a copy of your Form 1040 and pencil in estimates of your 2010 income. Look at your investment account statements to estimate your interest and dividend income and your investment capital gains and losses. If you have a business, estimate your business income/expenses for 2010. If you have rental property, estimate your full year income and expenses.
Step No. 3—Adjustments to income
There are 13 “top of the line” adjustments to income, which include items such as student loan interest, educator expenses, alimony payments and moving expenses. The most commonly used adjustment is for a traditional IRA contribution. For 2010, the limit is $5,000 for traditional IRAs, with an additional $1,000 contribution available for workers over 50 years of age. IRA contributions are subject to income limitations. Roth IRA contributions are not tax deductible.
Step No. 4—Itemized deductions
A key step for enhancing your tax plan is to estimate your itemized deductions for 2010. These include: allowable medical expenses, all state and local taxes, allowable interest, charitable contributions, allowable losses and miscellaneous deductions.
Pencil in your total deductions on your Form 1040 and subtract it from your adjusted gross income to determine your taxable income. Use the tax tables to determine your estimated tax. Subtract any applicable credits from your total tax. Using your pay stubs, estimate your income tax withholding for the year and add quarterly tax payments. Subtract your payments from the total tax to determine the amount of your overpayment or tax due. If you received a large refund or owed a significant amount for 2009, consider filing a new W-4 for with your employer. The ideal situation would be to owe a small amount of tax at filing time, so your money sits in your bank account and you are not giving Uncle Sam an interest free loan.
Step No. 5—Company benefits
Participation in tax deferred savings plans such as 401(K) and 403(B) reduces taxable income and increases the employee’s retirement account. For a taxpayer in the 25 percent tax bracket, setting aside the deferral limit of $16,500 will save $4,125 in current federal taxes. Individuals over 50 years of age can defer an additional $5,500 in 2010.
Flexible Spending Accounts allows employees to set aside funds for medical expenses that are not reimbursed by insurance and qualified child care costs. Pre-tax money is deducted from each pay and placed in the employee’s account. As eligible out-of pocket expenses are incurred and reported, the employee is reimbursed with funds from the account. As an example, a taxpayer in the 25 percent tax bracket, setting aside and using $3,000 from an FSA will save $750 in federal taxes. Talk with your company benefits specialist to discuss your situation and your use of a flexible spending account.
Step No. 6—Keep good records
Set up a tax filing system where you can keep receipts and cancelled checks for deductible expenses, such as contributions, interest, taxes paid and business expenses. Your records will help you keep track of deductions, when you are filing your taxes and will be invaluable in case of an IRS audit. Keep a copy of your tax returns indefinitely.
The time to begin your 2010 tax planning is now. It will make preparing and filing your return next year a relatively simple task. Additionally, the money that you save in taxes can be applied to some of your other financial goals. The information provided here is a basic guideline. It is recommended that you consult a qualified tax professional to assess your personal situation.
(Michael G. Shinn, CFP, registered representative of securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or to send your comments or questions to firstname.lastname@example.org. (c) Michael G. Shinn 2010. Neither Michael Shinn nor Financial Network provides tax advice. Please consult a tax professional before implementing any strategy.)