Tax tips for the New Year
Published 4:04 pm Thursday, December 31, 2009
Did you miss Dec. 31 deadlines to make your taxes a little lighter this year?
Your bill is not chiseled in stone. While it’s true options to save you big bucks come April are more limited, there are still a number of things you can do to make the tax-filing season cheaper and easier.
Claim your losses
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Many people lost money in the stock market in 2009. Don’t add to those losses; instead take time to harvest losses from your stocks and mutual funds.
“You can use up to $3,000 [in losses],” Edward Jones financial advisor Rob Estes said. “Say the Smiths have $50,000 in income and $3,000 in losses from stocks. They get to reduce their $50,000 to $47,000.”
Don’t forget, losses can also be carried over through time, Estes said.
Contribute to your retirement account
If you haven’t already, the deadline to contribute to your IRA or Roth IRA is April 15. While you’re at it, Estes suggest you may want to consider switching your IRA to a Roth IRA.
“A traditional IRA provides the investor with a tax deferred account, so there are no taxes until you withdraw,” Estes said. “The disadvantage to that is that while everyone wants a personal crystal ball to determine where taxes will be when they retire and begin to pull funds out, we just don’t know.”
When you have money in a Roth IRA, there is no limitation on how much you withdraw, when you withdraw it and there will be no taxes on it when you withdraw.
Additionally, investors who convert to a Roth IRA in 2010 may report taxable income in two equal installments in 2011 and 2012.
“It’s a lot easier to pay taxes when you’re still working,” Estes said.
Converting to an IRA in January is particularly timely because income restrictions will be lifted for investors switching from a traditional IRA to a Roth IRA. Otherwise, a couple will be phased out of an IRA when their adjusted gross income reaches $166,000 and couples with an adjusted gross income of more than $100,000 could not convert previous to January.
It’s also ideal for people who had a 401k through their job but have recently lost their job.
“There are a lot of people with 401ks who have lost their job,” Estes said. “You can roll it into an IRA with no tax implications.”
While the contributions to the accounts are not a tax write off, placing your money in an Roth IRA will allow your money to grow tax free.
Contribute to your child’s college fund
Plan ahead for your children’s future and save yourself some taxes. A 529 account is a tax exempt savings account for future education expenses. All monetary withdraws from the account used for qualified education expenses will remain tax free.
“The owner of a 529 can put in $4,000 per child in new contributions,” Estes said. “If you have four children, you can max the accounts out and write off $12,000.”
Also keep in mind, anyone can contribute to the accounts, but it’s your write off. Friends and relatives can add money to the account without any provisions.
Planning ahead now will help ensure you’re not scrambling come April. Always consult your tax advisor before making any changes.