Here comes the end of the year! (Yikes, already?)
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…)
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.)
- Deduct Moving Expenses – Also subject to the 2 percent miscellaneous deduction floor.
- 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.
- 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.
- 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.