It may seem a bit strange to be talking about income taxes in September. There are, however, good reasons to think about taxes well before April 15. For starters, there are some big changes in the tax code that go into effect in 2011. Depending on your income tax bracket and investments, some simple planning now could save you a bundle later.
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And taking steps now to organize your tax files can avoid headaches and aggravation at tax time. So we’ve put together 5 tax moves to make now to take advantage of changing tax laws and to better prepare for tax season.
1. Evaluate Capital Gains: The current long-term capital gains tax rate, with some exceptions, is either 0 percent or 15 percent depending on what ordinary income tax rate you fall into. But in 2011, these rates jump to 10 percent and 20 percent. That means if you have some investments that have done well, you may want to consider selling them in 2010 to take advantage of the lower tax rates. If you currently fall within the 0 percent long-term capital gains rate, the decision may prove to be an easy one. But even for those that fall into the 15 percent bracket, saving 5 percent over next year’s higher rate is significant. Of course, the tax consequences of an investment are just one factor to consider when deciding whether to sell.
2. Make Money Now: As you’ve probably heard, some of the higher income tax brackets will get even higher next year. The top two rates for the 2010 federal income tax brackets are 33 percent and 35 percent, which will move to 36 percent and 39.6 percent in 2011. The effect these changes will have on lower tax brackets depends on what Congress does this year, but the lower tax brackets are set to increase as well. If you fall into a rising tax bracket, it may be in your best interest to accelerate income into 2010 if at all possible. This could be particularly helpful for small business owners and independent contractors who have some control over the timing of income.
3. Green Your Home: There are several energy tax credits that are set to expire at the end of the year. For example, you can get a tax credit up to 30 percent of the cost ($1,500 maximum) on certain qualifying home improvements, such as roofs, water heaters, and HVAC systems. Make sure to verify that the product you want to install qualifies for the tax credit. And get the work done this year before the tax credit expires.
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4. Get Organized: Every year on April 15th at about 8 pm I tell myself I’ll be better organized the following year. While it’s taken several years of last-minute tax return filings to finally motivate me into action, this year I’m actually organized. The key is not to wait until tax season. Keep records of your taxable investments to help you calculate gains and losses. Keep your business receipts organized and separate from personal expenses. If you’ve made home improvements that qualify for tax credits, keep your receipts in a separate file. Staying organized takes just a few minutes week, but it can save you a lot of headaches when it comes time to file your taxes and will reduce the risk that you’ll miss a tax deduction.
5. Plan Your Tax Preparation: Many use online tax software to prepare and file their tax returns. For those folks, they have some time before the 2011 versions of the tax software are released. But if you plan to have a tax professional prepare your return, there are good reasons to hire them now. First, you can take your time to find the best tax professional for your needs, taking into consideration recommendations from friends and family. Second, they can further assist you with tax planning now in anticipation of the many changes to the tax code in 2011.
It’s important to recognize that tax planning is specific to each individual’s situation and can involve complex analysis. So if you think some of these tax moves may be right for you, consult with a tax specialist before making any decisions.