The color of the trees are changing during the beautiful fall season, and that also means it’s time to begin thinking about strategies for minimizing your 2011 income taxes before the year has come to a completion. Remember, that when it comes to lowering income taxes, you generally have to large rock strategies. Above the line deductions are tax deductions that reduce the amount that will end up on the taxable income line to determine how much tax you should have paid for 2011. Below the line deductions, which mainly have to deal with tax credits that will offset the tax you owe dollar for dollar in most cases. It is important to note that there are many strategies to keep your income taxes down, but here are four you should consider before the clock strikes midnight in 2011.
- Max out your contributions to your employer sponsored retirement plan – For most of you this will be your 401(k), 403(b), or 457 plan through work. Even though you may have started the year only putting away 3 or 4%, you can in most cases actually contribute most or all of your paycheck in the last couple of months depending on the rules of the plan. For those under 50 years old, you could put away as much as $16,500 in 2011. For those over 50 years old, you can put away as much as $22,000 using the catch up rule contributions. Many people never read the full rules of the plan, so consequently they don’t realize that they could put away 20%, 30%, or 40% or more of their paycheck if they cash in the bank to live off of for the last couple of months of the year.
- State or Federal Tax Credits – Depending on what state you live in, there may be state tax credit investment programs you can take advantage of before year end. Some states have no income tax, but for those who do this would be something important to check into the last couple of months of 2011. In the state of Georgia, there are Film Tax Credits that could save you 10 to 15 cents on every dollar. From a federal tax credit perspective there are sophisticated programs such as conservation easements or affordable housing credits that could make sense for your situation. You should consult with a qualified financial advisor, CPA, and/or attorney before doing one of these programs.
- Non-cash charities – I’m amazed at how many people miss this deduction just from being lazy with their record keeping. Make sure you clean out all of your old drawers and closets, and get yourself several receipts from the places you donate your goods. The most important part of this process is to ensure that you itemize what you gave away instead of just writing two bags of stuff on your receipts. Also, charitable miles still can be written off at a rate of .14 cents here in 2011. By combining both of these, you could save a significant amount of tax before year end.
- If you own a small business, put your kid’s on payroll – Most small business owners are always asking the question on how they can pay less in taxes. If your child is of the appropriate age, you could consider putting them on the company payroll. With kid’s knowledge of technology, it is even easier than before to justify the work that your child can do in the business. If you pay your child up to the normal standard deduction, you won’t have to pay income tax on that money and neither will they. There will be a little bit of payroll tax, but it will likely be a heck of a lot lower than the income tax you’ll pay given overall income tax rates.
Nobody likes paying more taxes than they have to every year—that is unless you are Warren Buffett these days. Do your planning now in October before Thanksgiving and Christmas time hit you at the year end rush. This will allow you to keep more of what you make here in 2011.
Visit www.oXYGenFinancial.net to request a consultation with the leading personal financial advice experts for Generation X and Y in the country.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
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