As 2010 draws to a close, it is time for the annual publishing of the end of year tax tips articles. Or, for the mainstream media, it’s time to re-publish pretty much the same thing that was published last year, rehashing the same old annual tax savings strategies.

I thought we’d go ahead and get a jump on them (Isn’t that what good personal finance blogs are for?) by pre-posting all of the standard, run of the mill, year-end tax tips before Thanksgiving. Of course, if you are serious about tax planning, you’ve already done all of this and more. Don’t worry, we’ll be publishing new, little-known, tax tips and end of year tax tricks for 2010 soon.

Here they are the Common 10 Tax Reduction Strategies for 2010

(and 2011, 2012, 2013, etc…)

1. Donate To Charity – Definitely a good write off for high-income taxpayers and everyone else. Of course, the only tax deduction more well known than donating to charity is deducting mortgage interest on your home.
2. Deduct Your Medical Bills - This is wasteful advice for most taxpayers. The medical expenses deduction only applies to medical and dental bills that exceed 7.5% of your income. In other words, if your income is $100,000 and you have $8,000 in medical expenses, you only get a tax deduction for the amount of medical bills you paid over $7,500, or $500. Unless a family member had surgery or hospitalization during 2010, chances are your medical bills aren’t this high. Don’t bother gathering up all your medical receipts and EOB statements from the insurance company until you figure out what your medical deduction floor is.
3. Pay Your January Mortgage Payment In December – This is a good way to increase your tax deductions for THIS YEAR ONLY. By paying your January mortgage payment in December, you can deduct the mortgage interest on your 2010 taxes instead of waiting until 2011. That gives you 13 months worth of home loan interest deductions instead of 12 months. Good deal. But, you have to keep doing it every year from now on, or you will end up raising your taxes in the future, because the first year you don’t pay it early, you only have 11 months worth of payments to deduct that year.
4. Contribute to an IRA - Another good tax deduction. However, it doesn’t apply to high-income taxpayers with a retirement plan offered at work. Calculate if your IRA contribution is deductible first. If not, you are better off contributing to a Roth IRA if you can.
5. Contribute to 401(k) Plans – Nothing wrong with this way to lower your taxes. However, you can only contribute pre-tax dollars to a 401k via salary reduction, and you can only raise that amount so high depending upon your plan. There may also be a lag in when it goes into effect. This is more of a longer-term tax planning move. If you can change your withholding right away to take effect on pay checks before year end, then go for it. Otherwise, you are just making your January paycheck smaller. Unlike IRA contributions, you can’t deduct 401(k) contributions until April 15th.
6. Deduct Job Hunting Expenses - With high unemployment and many people having been out of work during 2010, this is a nice topical tax deduction. Just one catch. Like medical expenses, job hunting expenses have a floor. You can only deduct job search expenses that exceed 2% of your income. (Actually, this is the floor for the total of all miscellaneous deductions, so if you have other work related expenses, it might be more usable.)
7. Deduct Moving Expenses – Also subject to the 2 percent miscellaneous deduction floor.
8. Deduct Internet Access, Phone Bills, Cell Phones – Unless your employers requires you to have these as a condition of employment and does not reimburse you, you cannot deduct phone bills or monthly internet charges. Notice that “requires as condition of employment,” is not the same thing as, “need it to work from home.” Even if you meet the criteria, keep in mind that, technically, if you use it to surf the web, play games, download music, call your wife, friends, or kids, or anything else personal, then you also cannot deduct it as solely for business.
9. Unreimbursed Business Expenses – Again, these must be “required” and not paid for by your employer. If you have to drive to a meeting at another office and your employer does not reimburse mileage, then you can deduct the miles driven using the IRS 2010 mileage rate. You can never deduct the cost of commuting back and forth between your home and employer.
10. Generate Capital Losses – There is a right way and a wrong way to generate capital loss deductions. We’ll cover it in a future post, but suffice to say, you shouldn’t put tax decisions above investment decisions. Don’t forget about the IRS wash sale rule, which prohibits selling and re-buying a stock or other investment within 30 days and deducting the loss.

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Lower Your Taxes – Increase Tax Deductions 2010 originally published at Finance Gourmet

The IRS publishes various numbers, tax brackets, and the like for the next tax year during the fall of the previous year, depending upon what the number is, and how it is to be calculated. Maximum salary limits for Roth IRA contributions in 2010, for example, were known well in advance because the number was set in statute to be the same as the high income limitations for 2009 Roth IRA contributions.

However, starting in 2011, the income limitations for Roth IRA contributions are indexed for inflation. In other words, the IRS must wait until it has the proper inflation index calculation according to its rules and regulations. Then, it must apply that inflation amount to the Roth IRA contribution limits for income and compute new Roth IRA income phase-out limits and the maximum salary allowed to make Roth contributions at all.

These numbers will not be available until later in the year. When we get the new 2011 Roth IRA limits, we will pass them on to you.

Don’t forget, the law removing the salary cap for converting a traditional IRA to a Roth IRA has been made permanent, so you can covert your IRA in 2011 regardless of how high your MAGI is.

New Roth IRA Income Maximum Salary Limits for 2011

With all of that being said, we can actually make some educated assumptions.

Inflation has been low to non-existent for 2011. That means that Roth IRA income limits will likely not be going up for the 2011 tax year, or that any increase will be very small.

For your advanced tax planning strategies, you can continue using the same Roth IRA numbers from 2010 taxes for your 2011 taxes. There may be some small adjustments necessary when the final IRS numbers come out, but you can safely assume that any calculations based on the 2010 tax-year will be fairly close.

Note: The same information applies to traditional IRA limits for 2011 as well.

Related posts:

1. 2011 Section 179 Deduction Limits for Small Businesses Taxes
2. Standard Deduction 2011 and 2011 Tax Brackets

2011 Roth IRA Income Limits originally published at Finance Gourmet

One of the most effective ways for typical households to lower their tax bill is by donating items to charities. Unlike cash donations, donating used goods to charity is a free way to reduce the income taxes you pay. A quick trip to the basement or storage closet could turn up several trash bags worth of used clothing that no longer fits your children, or you. Other items like shirts, pants, suits, jackets, shoes and more may just be out of style, or no longer fit your current dressing manner.

For example, workers who used to have to wear a suit and tie to the office may now work in a business casual environment. Unless you live on the East Coast, suit and tie occasions don’t come up all that often. Hold onto one dark suite for funerals and formal weddings, and one less formal suit for other semi-formal events. Even clinging onto one fun suit, or stylish suit that you "might" wear to "something" someday can still leave you with a dozen suits that can be donated to local charities. Keep track of everything you donate with "contemporaneous records." Take the receipt from the charity and fill it out right away, but also keep a log in a notebook or a note card of everything you donate.

If you haven’t cleaned out your basement or storage unit in the last few years, there might be TONS of used clothing in there that you can donate. Don’t be afraid to donate it all and claim every last penny on your income taxes. Again, just keep very good records of exactly what you donated and when. Back up the charity’s receipt with your own logs, and, for extra measure, take some digital photos of the clothing. There is no need to capture itemized pictures, a few pics of a giant clothing pile and maybe one or two of the twenty bags being dropped off at Goodwill should be more than enough proof to head off any challenge regarding how much you donated. (How much you valued each item at, is a different story, which will cover next year when we talk about how to prepare your 2009 Federal Income Taxes.)

Don’t stop at clothing. Small appliances (think anything that could be used in a dorm room or small apartment), electronics, sporting goods, and more can all be donated to charities that would gladly accept them.

As an added tip, break up your donations by dropping them off over several days, or donating a portion of your used goods to various different charities. The IRS requires additional documentation for single donations that exceed $400. Keep each donation under that amount, and relive the extra burden of documenting larger charitable donations.

With many charities having one of their worst year ever raising money for good causes, now is the time to pitch in and help out. By donating unwanted items that are laying around your house, you not only help good causes that you believe in, you can also make some money and save on your taxes next year at the same time. Plus, you house will be cleaner, and you might actually be able to find some of those important things that are lost in your storage areas.

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End Of Year Tax Tips – Save Money On Taxes By Donating Clothing and More originally published at Finance Gourmet

Updated Information for 2010 179 Deduction Limits for Small Business Taxes has been published.

Business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. Business owners, particularly, single proprietors are often hit with high tax bills because of the Self Employment Taxes.

Self-employment taxes, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. As an entrepreneur, the small business owner gets a double taxation whammy on things like Social Security taxes. The standard worker with a wage paying job at an employer pays 7.5% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. The employer also pays 7.5% in SS taxes.

The total Social Security Taxes adds up to a whopping 15%. A small business owner that files as a sole-proprietor is on the hook for the whole thing! That means that an entrepreneur pays 15% in taxes for Social Security on top of the regular Federal Income Taxes that they owe. For a successful small business owner with a high-income that puts him in the 30% tax bracket, that adds up to an astounding 45% Income Tax rate. And, that is before things like Medicare taxes, state taxes, and local taxes.

In other words, a small business owner can pay 50% or more very easily in taxes!

The only defense against such barbaric tax-rates is to take as many business tax deductions as possible. By doing so, the business lowers its profit for tax purposes, and therefore passes along less income to the taxpaying business owner on his Schedule C – Profit and Loss From Business Operations.

As an aside, this financial dance with the IRS is what causes legitimate, successful business owners to have trouble qualifying for mortgages or other loans. By the time these deductions are all taken, the income the business appears to earn can be substantially lower than its actual profits as they apply to the business owner’s bank account. This is why stated-income mortgages are so important for the self-employed. Unfortunately, scumbag mortgage brokers uses these mortgages to get unqualified borrowers into mortgages for houses that they couldn’t afford. These days, stated-income mortgages are all but dead thanks to these crooks.

Unfortunately, racking up sizable tax deductions by buying office supplies like paper, toner, and ink cartridges is difficult, even when paying the criminally overpriced rate for brand name printer ink and toner.

2009 Section 179 Limits Business Tax Deduction

The savior for many small business owners is IRS Section 179. Section 179 allows for a certain amount of business expenses to be deducted immediately, instead of depreciated over several years. This is particularly useful for out of date tax depreciation limits like those on computers. Imagine how laughable it is to deduct a netbook purchase over five years. Odds are a netbook will not last 5-years. Even better odds are that it won’t be "useful" in 5-years regardless of the what the IRS says.

With a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting $40 per year for five years.

Maximizing Section 179 Tax Deductions is a critical personal finance skill for any entrepreneur. Keep an eye here for more information on income tax deductions and paying Federal Income Taxes in the near future.

Related posts:

1. 2011 Section 179 Deduction Limits for Small Businesses Taxes
2. More Tax Deductions for Small Business Owners and Sole-Proprietorships

Section 179 Deduction 2009 Limits for Small Businesses, LLC, Sole-Proprietorships, and More originally published at Finance Gourmet

While starting a phony small business is not a good idea, no matter how big of tax savings can be achieved, there are many legitimate businesses that people can start. The key aspect of being legally considered a business for tax purposes is that there must be a profit motive to the activity. That profit motive must outweigh other reasons for engaging in the activity, otherwise, the enterprise could be considered a hobby instead of a business.

Formally incorporate the business with the Secretary of State in your state. Set up a LLC, it makes a great business structure for single-owner small businesses and is typically cheap and easy to setup. Filling out an online form and paying a registration fee is usually all that is required.

Then, get an Employee Identification Number, or EIN from the IRS. Unofficially known as FEIN by some people, an EIN is free and can be applied for and issued instantly online.

These steps go a long way toward legitimizing your business. Make sure you report a little bit of income along the way (verifiable income that comes with a 1099 is best) and your business can save you lots of money on taxes over the years.

(Finance Gourmet has no affiliation with MortageCalculatorium – They are stealing our RSS Feed – Come to the real personal finance advice site)

Small Business Tax Deductions That Regular Filers Can’t Get

With a small business, that trip to Office Depot is tax deductible. A business also makes it so you can deduct buying new computer equipment like monitors, printers, desks, chairs, and other office furniture. You can also deduct office supplies. All you have to do to save hundreds of dollars on your taxes is keep a mileage log for business purposes, and save those receipts for everything you purchase for the business.

When you file taxes for a LLC make sure to distinguish between office supplies like paper, toner, ink cartridges, coffee, notebooks, calculators, and so on, from capital expenditures. The difference lies in the usable life of the office equipment or office supply. Most consumables are considered office supplies, while items with a usable lifespan of years are considered equipment or capital.

The importance of this difference is that office supplies are straight tax deductible, while equipment or other capital expenditures may need to be depreciated. The definition of depreciation is that the amount deducted is equal to the amount of usable life that has been used up during the tax year. Since there is a lot of room for interpretation there, the IRS has formal depreciation tables and rules that state how long certain classifications of equipment must be deducted over. For example, if an item must be depreciated over 5 years, then the business can deduct one-fifth (1/5th) of the purchase price of the item in the first year, and then 1/5th, or 20% of the price in each of the four following years.

It is typically in the business’ best interest to deduct items as quickly as possible. Fortunately, small businesses can take advantage of a special tax provision for entrepreneurs and other small business owners.

2009 Section 179 Limit

Businesses may deduct the full cost of some items regardless of the usual taxable deprecation schedule as Section 179 Expenses. The Section 179 limits for 2009 is $250,000. That means that a business can deduct up to $250,000 worth of anything without having to depreciate it over the normal lifespan of the item. For high-income taxpayers, this offers a big tax deduction if used properly.

Section 179 Limits 2009 Vehicles

Deducting the cost of an automobile has been a favorite tax deduction for tax payers with high incomes. However, the total depreciation deduction for a passenger automobile placed in service during 2009 is $2,960, or $10,960 for automobiles that qualify for the special depreciation allowance.

The maximum deduction for a truck or van is $3,060 or $11,060 for those that qualify for the special depreciation allowance.

The old tax loophole for buying a Hummer, Suburban, or other heavy vehicle to get a bigger Federal Income Tax deduction has been largely closed.

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More Tax Deductions for Small Business Owners and Sole-Proprietorships originally published at Finance Gourmet

This is the true, cold, hard fact: There is virtually nothing you can do to lower the amount of taxes you pay on earnings that come in the form of a steady paycheck.  Sorry, but it is true.

Tax Advice and Tips and Tricks

So, what exactly is in these so called advice articles?  Mostly things that will not apply to most people, or nickel and dime savings that won’t make much of a dent.  But, tax advice articles are popular, especially at year end.  Let’s take a look at the most common advice.

• Pay Your Next Mortgage Payment By December 31 – This doesn’t lower your taxes so much as borrow a deduction from next year’s taxes.  The idea is that by paying your January 1st mortgage payment in December, you get to deduct 13 moths worth of interest, instead of 12.(Mortgage payments used to be due on the 1st of the month, that isn’t always true anymore, but old tricks die hard.)  While this works, it works one time.  Worse, you have to do the same thing every year from now on.  Why?  Because you already deducted your January mortgage interest last year, you will only get to deduct 11 months worth of the interest the following year unless you pay the year after January payment early too.  This idea is really only valuable to people whose income varies from year to year.  If this was a good year for you, then you could use this trick to help lower your taxes in this high income year.  Then, if the next year or two you have a bad year, you can “reset” this trick by not paying the January mortgage in time.  Sure, you’ll only get to deduct 11 months worth of interest, but if your income is significantly lower then it works out.
• Charitable Donations – This one is actually very true.  Make your charitable donations by December 31, and you can save on taxes this year.  Unfortunately, for most people, this is small potatoes.  Look at it this way.  If you made $100,000 this year and you end up paying 20% that is $20,000 in taxes.  By donating $1,000 in December, you reduce your income to $99,000 and pay 20% which is $19,800 in taxes.  Sure, it is a savings, but the difference between $20,000 and $19,800 isn’t what most people mean when they ask how to lower their taxes.  Unless you are donating big (and if so, you should set it up before December so there is no rush) this won’t make much change.  Still, if you have a donation sitting in your garage, get it in by December 31.  Everything helps, just don’t expect miracles.
• Selling Investments to Generate Taxable Losses – If you learn one thing about investing ever, please let it be this: Always do what is right for your investment strategy/plan FIRST, then worry about taxes.  Sure, lots of your investments may be negative right now, but that doesn’t mean that selling is the smart move.  If you have mutual funds that you did not pay a load for and will not pay a load to sell them, AND you have a replacement fund in mind that you can also purchase without a load, then selling to generate losses makes sense. Otherwise, if you have good investments, keep them.  Remember, you can only deduct your capital losses against your gains, so if you don’t have profits you can’t deduct the losses, except for $3,000.  The rest carries forward until you have gains. Generating $15,000 of losses doesn’t do you any good for your taxes this year.
• Scheduling Medical Appointments or Other Medical Expenses – Repeat after me: Getting medical expenses in before the end of the year is smart in order to spend all of the money in a flexible savings account, not because of deductions.  In order to deduct medical expenses, they have to exceed 7.5% of your income.  If your income is $100,000 you can only deduct expenses that are OVER $7,500 for the year. In other words, $8,000 worth of medical expenses gives a $500 deduction.  Unless you don’t have insurance, or you had a lot of medical problems this year, there probably isn’t anything for you here.
• Other Expenses – Everything from moving expenses, job training, to tax preparation fees falls under the miscellaneous deduction.  In order to get any deduction, these expenses have to exceed 2% of your income.  Again, if you have $100,000 income, you’ll need $2,000 in expenses before you save one penny on your taxes.  If you are close, then spend away.  If not, then you are better off waiting because you might be over it in 2009.

There are good legitimate ways to save on your federal income taxes.  However, most of them can’t be done with ten or twenty days notice.  So, make your donations and spend down your flexible spending accounts, but don’t sweat the other stuff.

By the way, you have until April 15 of next year to make your IRA contribution.  We’ll cover that in another post.

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End Of Year Federal Income Tax Advice Tips and Tricks originally published at Finance Gourmet

Taxes and Bonds

Because interest on bonds is taxed as ordinary income, avoiding taxes on that interest is more important to investors than avoiding taxes on dividends paid by stocks. Most corporate bonds are taxed at both the federal and state level which reduces the real rate of return to the investor. Municipal bonds issued by states are exempt from federal income tax because one branch of the government cannot tax another branch. Whether or not the state municipal bonds are exempt from state income tax is determined by the laws of the states they are issued in. Most states make their own bonds tax-free as a way to make them more attractive for purchase. This [tag]tax-free[/tag] status, plus the relative safety of most municipal bonds can make them an attractive investment for those in higher tax brackets.

However, these same benefits mean that muni bonds generally pay lower rates than other bonds. For federal taxes, if you are in a low tax bracket, the lower rate can actually mean a lessor overall return than if you invested in corporate bonds. The break even point is often somewhere around the 25% tax-bracket or above.

For state taxes, the analysis depends on the state you reside in. In Colorado, state income taxes are a flat 4.63% while in California, they go up with income like federal taxes. So, an investor in Colorado below the 25% income tax bracket may not reap any benefit from the tax-free nature of municipal bonds, while an investor in a higher bracket in California may come out way ahead by investing in California municipal bonds.

Higher Yield Muni Bonds

Some states do not have an [tag]income tax[/tag]. (They usually have much higher sales taxes or property taxes than those that do.) For those states, municipal bonds can carry a higher interest rate. Texas, for example, does not have an income tax. Therefore, there is no advantage to Texans to buy Texas issued municipal bonds over those issued by other states. As a result, similarly rated Texas Municipal Bonds often end up paying a higher interest rate in order to attract investors. If you are looking to invest in municipal bonds but don’t need the state income tax deduction for your planning purposes (if you live in a low income tax state) then when [tag]investing[/tag] always make sure to check out the non-tax state’s municipal bonds as well as your home state.

Related posts:

1. Meredith Whitney Muni Bond Defaults Fails to Materialize
2. Not Cashing Savings Bonds to Avoid Taxes

Muni Taxes Stay the Same originally published at Finance Gourmet