Plan for your 2011 taxes now
Created on Friday, 29 April 2011 09:53 Last Updated on Monday, 03 December 2012 19:34 Published on Friday, 29 April 2011 09:53 Hits: 2008
“Help yourself and your tax accountant by keeping all of your tax related receipts and documents in one place. Also, think ahead about how you can reduce your tax burden during the year through use of retirement plans, tax deductible contributions, etc.,” states Kevin Penn, CPA and tax advisor in Cleveland, Ohio.
Even though Congress and the Administration are in a rancorous debate over deficit reduction, major changes to the tax code will most likely take place for the 2012 tax year. Ask your tax professional to help you lay out a tax plan for 2011. When it comes to taxes, procrastination is your biggest enemy.
Step #1—Major Family Changes in 2011
What major changes might take place in your family during 2011 that may affect your tax situation?
•Will you earn significantly more or less money during 2011?
•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 #2—Estimate Your 2011 Income
Start with your 2010 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 2011 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 2011. If you have rental property, estimate your full year income and expenses.
Step #3—Adjustments to income
There are thirteen “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 2011, the limit is $5,000 for traditional IRA’s, with an additional $1000 contribution available for workers over 50 years of age. IRA contributions are subject to income limitations. Roth IRA contributions are not tax deductible.
Step #4—Itemized deductions
A key step for enhancing your tax plan is to estimate your itemized deductions for 2011. 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 2010, 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 #5—Company benefits
Participation in tax deferred savings plans such as 401K and 403B 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 2011.
Flexible Spending Accounts allows employees to set aside funds for medical expenses that are not reimbursed by insurance and qualified childcare 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 #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 2011 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.
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