Just a little over 2 months before it is TAX TIME. Let’s take a look at a few tips to help you save $$$ on taxes, not only on this year’s filings, but going forward as well.
- New FSA limits
Medical flexible spending accounts, or FSAs, are not quite as flexible in 2011. These plans allow employees to put pretax money into accounts and then use the money to pay for medical expenses not covered by insurance.
One category, no longer eligible for reimbursement is over-the-counter medicines. Beginning Jan. 1, 2011 you know must get a doctor’s prescription to use FSA money to pay for over-the-counter medications. Cold medicine, antacid tablets, etc now need a written order.
- Create a bunching strategy
Actual medical costs also could become tax savings if you have enough of them to deduct. To claim them as itemized deductions, you must have incurred medical costs of more than 7% of your adjusted gross income.
Miscellaneous itemized deductions also have a threshold you must meet before the costs can be of deductible value. That amount is 2 percent of adjusted gross income.
These targets mean that if your adjusted gross income is $50,000, your medical write-offs must be more than $3,750 and your miscellaneous expenses more than $1,000 in order to benefit you on your Schedule A.
Start planning your tax-deductible expenditures early in the tax year, and you’ll make sure you clear these deduction hurdles. This is known as creating a bunching strategy, since it usually entails moving, or bunching, expenditures into one tax year so you can take advantage of itemizing them.
- Give to charity
You don’t have to meet a threshold to deduct your charitable donations. As long as you give to an IRS-qualified organization within the tax year, you usually can claim as an itemized deduction the full amount that you give.
Typically, folks wait until the end of the year to donate to charities. Consider spreading your giving throughout the year.
The groups that get your dollars or goods will appreciate the donations earlier in the year when their accounts might be running a bit low. And by giving early, you won’t have to worry about your philanthropic nature competing with your holiday gift-buying tasks at year’s end.
- Adjust your withholding
When it comes to payroll withholding, you want to be Goldilocks and get it “just right.”
If you over withhold federal taxes, you’ll get a big refund. That’s nice once a year, but you’ve sacrificed control of your dollars for the other 364 days.
If you under withhold, you’ll end up owing the IRS at filing time. Owing a little isn’t too bad, but a big tax bill could cause you to face penalties for not paying enough throughout the year.
It’s easy to change your withholding. Just give your payroll office a new W-4. There are plenty of payroll deduction calculators online you can use to get your deductions close to where you want to be.
- Convert to a Roth IRA
Roth IRAs are popular because when the money is withdrawn in retirement, there’s no tax due. These accounts are enjoying a new surge of popularity now that there’s no longer an income limit on who can convert a traditional IRA to a Roth account.
This conversion option became available last year and also included the ability to spread any taxes due upon conversion over two subsequent tax years. The tax-deferral opportunity is gone. If you convert a traditional IRA to a Roth IRA in 2011, you’ll have to pay all conversion taxes this tax year. But for some, it still might be worthwhile to convert to a Roth.
- Evaluate educational accounts
College costs increase every year, but tax-advantaged savings accounts can help. The key is determining which plan best suits your needs.
Every state offers at least one 529 plan, a savings account set up for a child to help pay for future college costs. Your contributions to a 529 plan are not tax deductible, but the earnings are not taxed. When you take out funds to pay for eligible expenses, the distribution also is tax-free.