Two Steps to Save Taxes

As 2010 winds down, holiday planning replaces memories of summer.  The kid’s fall sports are over and you have a brief week’s respite before Thanksgiving and Black Friday’s kickoff on the Christmas grid-iron. For many of us this “pre-season” lull is used to plan holiday logistics and finances.  It also provides the perfect opportunity for a quick tax review that may reduce your tax bill, providing extra cash for presents and holiday travel.  Today, we’ll discuss two surprisingly simple steps you can take to make your holiday burdens a tad bit lighter and this year’s season a few shades brighter.

Step One – Be Aware.  More situations lend themselves to tax credits (generally a dollar for dollar reduction in tax due) or tax deductions (a reduction in income subject to tax) than you may think.  Two of the primary reasons individuals and families pay too much tax is: 1) They are not aware that a particular credit or deduction exists, or 2) The transaction(s) that create the tax-saving opportunity are either forgotten, not properly documented, or too difficult to find under April 15th’s looming shadow.  If you take a few minutes to become aware of common situations that lend themselves to tax savings it will not guarantee a credit or deduction.  It will, however, ensure the opportunity is not lost simply because you didn’t know.

Below is a list of common situations that may result in a credit on your 2010 tax return.  A credit may be available if you find yourself part of any of the following scenarios:

• Adopting a child;
• Attending college or vocational school to seek a degree or improve job skills;
• Having one or more child attending college or vocational school in a degree or certificate program;
• Having children in daycare so you can work;
• Paying federal tax on fuel used on a farm;
• Paying for health insurance while receiving pension payments from the Pension Benefit Guaranty Corporation;
• Making home improvements such as replacing doors, windows, HVAC unit or adding insulation (manufacturer’s certificate required);
• Purchasing a new principal residence that was under contract before May 1st, 2010 and closed on by September 30, 2010;
• even saving for retirement can result in a credit if your income meets certain levels.

Here are some situations that may result in an “above-the-line” tax deduction, reducing your federal and state taxable income regardless of whether you itemize deductions or not:

• Being a government employee (paid on a fee basis) or a performing artist who incurs work-related expenses;
• Paying travel expenses if an Armed Force reservists who travels over 100 miles and stays overnight to fulfill service commitments;
• Spending personal funds on classroom expenses as a teacher, teacher’s-aid, counselor, or principal (this deduction has yet to be extended to 2010);
• Paying student loan interest;
• Moving due to work and the distance between your new job location and previous home is at least 50 miles more than distance between your old job and previous home;
• Paying alimony as decreed by court; being self-employed and making contributions to a SEP, SIMPLE or qualified retirement plan;
• Being self-employed and paying health insurance premiums;
• Paying penalties on early withdrawal of savings;
• Contributing to an IRA, MSA, or HSA.

Step Two - Get Organized:  Create a 2010 tax folder or envelope (a large manila envelope will do fine). Review this article and the list above.  If you find yourself in any of these situations, highlight or mark them.  Then, gather receipts and documentation related to the marked items and place them in your new 2010 tax folder.  Include notes of related credit card charges or checking account transactions.  Place your tax folder in a safe location.  When tax documents start to arrive early next year place them in your tax folder.

Becoming aware of potential tax-saving situations and applying a little organizational skill can go a long way to reducing your tax bill and help pay holiday expenses.  Today, I listed number of situations that may lend themselves to tax credits and above-the-line deductions.  I did not have space to list them all and didn’t even mention deductions available to those who itemize – a topic to discuss in the future.  As always, if you should have any questions or need to consult with a tax professional, please feel free to call our office.

HBS Tax Email Newsletter Sign-Up: