With the U.S. Government surviving through the season on another Omnibus Bill floated to “save the Republic,” taxpayers should take the opportunity while Congress is out of session to consider how they will make the money to cover the bill. It’s time to make a new year's list, and check it twice, in the hope that financial solvency can be achieved by every American, if not by the government.
Preparing to pay the taxes that the government so loves to spend can be done more efficiently, and at a savings, with a little preparation:
10 Tips to Timely Tackle Taxes
1. Check your records. The most common cause of missed deductions (and higher taxes) is a lack of understanding. People often don't realize what their income and expenses are until it's too late. Take the time after the holiday rush (but before the first of the year) to review income and expenses for tax minimizing purposes and get ready to act on them. Some will need action before the first of the year.
2. Save your records. The most common cause of IRS audit adjustments is a failure to meet their rather stringent documentation requirements. Cancelled checks are not enough. Take the time now to collate them with paid receipts for the best results. Your tax preparer will thank you later.
3. Bundle your deductions. This is really more of an act of timing than anything else. Depending on your tax bracket and state of residence, accelerating charitable giving or paying local taxes before the end of the year might be repaid by reduced taxes of 40% or more. For the self-employed this might increase to 50%. Regular business expenses paid "now" or "later" can make a big difference.
4. Timing counts. Sometimes we have the opportunity to choose when income will be taxed. For example, if you have a stock that has appreciated in value, you can sell it in December or sell it in January. Choose wisely. If you have other losses that can be used to offset gains, you might want to sell before the end of the year. If not, you might want to delay until after the 1st.
5. Beware the AMT trap. We are not dyslexically referring your friendly "money machine" that allows you to take a few twenties out of your account at night. The Alternative Minimum Tax is, rather, Uncle Sam's "money machine." Originally designed to affect only the very wealthy taking esoteric loopholes to drastically reduce their taxes, the AMT has come to apply to middle-income folks. Before taking action on these tips, be sure to check with your tax and financial advisors as to how they might impact your Alternative Minimum Tax.
6. Avoid the RMD trap as well. If you are over 70-1/2 years of age, you will be penalized if you do not take (and pay tax on) the required minimum distribution from your Qualified Retirement Fund. However, you can support your favorite charity and exclude such RMD from income if you use your Fund to make a "qualified charitable distribution." This opportunity ends in 2011, so don't wait. Use a QCD to satisfy your RMD.
7. Home repairs can help. We all spend money every year to repair and maintain our homes. Consider whether any of these costs might qualify for the Energy Tax Credit. Whether it involves windows, doors, insulation, roofing, water heaters, furnaces, air conditioning or more exotic "green power" items, the ETC can put money back into your pocket. Check it out.
8. Fund your retirement plan. If you are an employee, or utilize an IRA, you have until the filing date to do so. However, there may be advantages to funding early. If you are a calendar year business owner, unless you have an SEP you only have until year's end to adopt a qualified plan and take even larger deductions from income. Your qualified financial advisor and tax counsel can help maximize these opportunities.
9. Consider conversion. Depending upon your income levels this year, since the tax rates have remained low this might be a good year to consider converting your retirement accounts into ROTH accounts. That will permit them to grow tax deferred during your working years while providing a tax-free income thereafter.
10. Faith, Hope & Charity. If, as many do, you plan to make a "year end" charitable gift, consider using appreciated capital assets or stock to do so. That way you can get a larger tax deduction without paying tax on the gain.
Conversely, if you have assets that have become reduced in value, do not give those assets directly to charity. Instead, sell them, take the loss, and give the cash. Certain types of Charitable Trusts might also afford an opportunity for tax deductions while providing income and estate planning benefits for you and yours.
One last tip: Relax. Live. Reflect on who you are and why you are here. Taxes are only one part of a much larger equation. Enjoy the blessings of the holiday season and the new year.
Former IRS attorney Gary Dettloff helped organize and establish the Taxpayers Advocate’s Office while in government service, and today consults on tax and strategic planning issues nationwide and overseas. Michael Hamrick, MBA, is Managing Partner with Waterford Risk Management, LLC, and Partner with Those Tax Guys, LLC.