It’s never too late to be thinking about new tax-savings ideas.  We all ‘get’ that taxes have become a necessary way to pay for the many essential services within our community, and we don’t mind paying our reasonable share.  But, that doesn’t mean that we can’t be smart about it and develop a plan that helps us generate more income, all while helping to pay for those costly essential services.

We know that the key to any successful venture is having a plan and sticking to it.  Sure, you might have the best luck in the world, but then again, luck is fickle and you never know when it will flee.  Devising a tax plan can help lower your tax liability by working throughout the year towards that goal of paying fewer taxes.  If the idea of developing a tax plan seems overkill for you, remember, EVERYONE can benefit from a tax plan.  If it seems too daunting to devise a tax plan on your own, call in the professionals!  In as little as one sit-down discussion, you’ll begin to see the value in planning for the year.

One of the most effective ways to reduce your taxes occurs before you even take your check to the bank: Employee Retirement Savings.  Some of the more common plans are the 401k and 403b.  Depending upon your employer, there may be others offered as well. The two primary benefits you reap by contributing to an Employee Retirement Savings plan are:

• Your contributions reduce your taxable income.  So for example, if you’re in the 28% tax bracket and you contribute $10,000 to your account, you’ve saved $2,800 in income taxes.
• Employers often match employee contributions.  That means if your employer matches $0.50 for every dollar you contribute to your fund, you’ve got an instant return investment of 50%. 

If you have self-employment income, then it may be possible for you to increase your retirement contributions by utilizing a Keogh plan. Similar in nature to an employee’s traditional IRA, this plan is simply a retirement plan for self-employed individuals. While the Keogh plans allow the individual to make contributions directly from their gross income and the taxes are deferred, the income taxes, gains on the account or interest earned are due upon withdrawal.

A third option is to take a tax credit.  You may not know this, but a tax credit is much more valuable to you, the tax payer, than a tax deduction.  For example, if you’re in the 28% tax bracket, then a deductible expense of $100 is worth $28.  But, a tax credit of $100 means you’re getting $100 more in your refund check. 

There are a lot of different tax credits, but here is a list of the most common that it’d be good to know more about:

• Child Tax Credit: For tax year 2009, you may be able to claim a $1000 tax credit for each qualifying child. Did you know that foster children are also eligible?  This credit is phased out if your adjusted gross income (AGI) is above a certain level.
• Lifetime Learning Credit:  The Lifetime Learning Credit is 20% of the first $10,000 you paid for qualifying tuition and related expenses each year.  The maximum credit for 2009 is $2000.  Expenses for graduate and undergraduate work are eligible.  Again, there is a limit of $58,000 AGI to be able to claim this credit.
• American Opportunity Credit: This educational tax credit – which expanded the existing Hope credit – helps parents and students pay for college and college-related expenses. This credit is worth up to $2500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student.  This is a $700 increase from the Hope Credit. To be eligible for the full credit, your modified AGI must be $80,000 or less – $160,000 or less for joint filers.
• Child and Dependent Care Credit:  If you have the responsibility of caring for a dependent that is under the age of 13 or for other dependents that are not able to care for themselves, then you may be eligible for the Child and Dependent Care Credit.  This credit can be up to 35% of the expenses associated with the care of these individuals.  Eligibility relies upon satisfying all eight of the IRS tests.

Consider paying your expenses BEFORE you incur them.  If your employer offers you a flexible healthcare spending account (FSA) or similar plan, then you can use pretax dollars to pay for certain medical expenses (including premiums and out-of-pocket healthcare costs).  This might include co-pays, deductibles and co-insurance amounts.  Depending upon the plan, you may be able to deduct some childcare expenses in addition to expenses related to prescription meds. Some plans allow you to pay for over-the-counter (OTC) items as well such as allergy, cold and first aid items with this benefit. Again, planning your course of action with this type of benefit is worthwhile as most are a “use it or lose it” type plan, meaning that if you don’t use all the funds in the qualifying year, you forfeit the remainder.

If you have, or plan to have, children and you want to send them to college, then there’s no time like the present to start saving for those hefty college tuitions.  The two most common plans for college savings are the 529 College Savings Plan and the Coverdell Educational Savings Account (ESA)

By investing in a 529 Plan or Coverdell Education Savings Account (Coverdell ESA), you’ll get a little assistance from the federal government in the form of a tax break. 

A 529 plan is designed to encourage parents and other family members to save money to help pay for Jr.’s impending college expenses.  The owner of this plan makes contributions to the account and can assign a beneficiary to receive the money once they reach college age. The plan stays in the owner’s name until withdrawn by the beneficiary for educational expenses.  A 529 plan is transferrable without penalties to another family member if say, Jr. decides he wants to forego a college education.  Depending upon your state, you may have the option of either a prepaid plan or a savings plan.

If you’ve been around for awhile, you may remember the Coverdell when it was considered an education IRA.  Times have changed, and so has the Coverdell both in name and function.  As a custodial account, Coverdell limits have increased from the ‘old’ $500 cap to a total of $2000 in a single tax year. These funds can be used to pay for qualified education expenses of the beneficiary of the account.

With so many variables and changes, it’s important now more than ever to seek the advice of a qualified, professional tax preparer.  For additional information on any of the above topics and how you can lower your tax liability, call our offices today at 907.569-3873!