Even though there are only a few weeks before 2010 personal income tax returns are due to the IRS, there are still several things you can do to reduce your tax bill. Here are five ideas:
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1. Contribute to a tax deductible IRA. If you have earnings from a job or self-employment (or receive alimony), you can contribute to an IRA for 2010 up to $5,000 ($6,000 if you were at least 50 years old by the end of 2010) up to April 18, 2011, the due date of the 2010 income tax return; a filing extension doesn’t give you more time to make the contribution. A $6,000 contribution by someone in the 25 percent tax bracket saves $1,500 in taxes!
You can deduct your IRA contribution whether or not you itemize your other deductions. However, if you participate in a 401(k) or other retirement plan at work, your IRA contributions are tax deductible only if your income is below set levels (see IRS Publication 590 for limitation details and other IRA information).
Bonus: In addition to a tax deduction for an IRA contribution, you may be eligible to “double dip” and claim a tax credit in addition to your deduction. There is a retirement savings contribution credit of up 50 percent of the first $2,000 in IRA contributions, for a tax savings of $1,000. Again, income limitations apply, as explained in Form 8880.
Alternative strategy: Instead of contributing to a deductible IRA, consider making contributions to a Roth IRA. While these contributions are not tax deductible, future earnings can become tax free. Again, income limits apply. However, the fact that you may have converted a traditional IRA to a Roth IRA in 2010 does not impact your eligibility to make Roth IRA contributions.
2. Contribute to a health savings account (HSA). If you were covered by a high deductible health insurance plan in 2010, you have until April 18, 2011, to make a tax-deductible contribution to an HSA. This account gives you a triple tax benefit: you deduct the contributions (whether or not you itemize other deductions), earnings in the account are tax deferred, and withdrawals for uninsured medical expenses are tax free. The contribution amount for 2010 is $3,050 if only you are insured, or $6,150 for family coverage. If you were at least 55 years old by the end of 2010, you can contribute an additional $1,000. Information about HSAs is in IRS Publication 969.
3. Claim a credit for prepaying certain tuition. If, in 2010, you paid for your child’s spring semester 2011 within the first three months of 2011, you may still be eligible to claim the American Opportunity credit on your 2010 return. The credit is up to $2,500 for tuition paid for each eligible student in the first four years of college. And 40 percent of the credit is refundable, which means it can be paid to you even if it’s more than the taxes you owe.
However, like many other tax breaks, income limitations apply for this credit. See instructions to Form 8863.
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4. Deduct a 2011 disaster loss on your 2010 return. If you were a victim of the winter storms within an area qualifying for federal disaster relief and insurance has not compensated you for your property damage, you can opt to deduct your 2011 losses on your 2010 return. To claim the loss, you must itemize deductions and reduce the amount of the loss that you deduct by $100 and 10 percent of your adjusted gross income. IRS Publication 2194 is a disaster loss kit explaining what you need to know about deducting your loss.
5. Ask for a filing extension. If you can’t meet the April 18th deadline, don’t despair. Just ask the IRS for an automatic six-month extension so you avoid any late filing penalties. Use Form 4868 to request an extension.
But remember that this extension doesn’t give you more time to pay your taxes, so ante up as much as you can to minimize or avoid late payment penalties.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s 1001 Deductions and Tax Breaks and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.