The tax environment is unstable at best. Economic pressures are calling for an overall reform and many advantageous provisions are expiring. There has been talk of such fundamental and actively used advantages such as the mortgage interest expense deduction being eliminated. As such, tax planning for 2011 and future years is complex at best, (unless you happen to be in possession of a fantastic financial advisor utilizing a crystal ball). However, there are some tried and true strategies that are likely to stand the test of time and make good sense both from a tax and financial standpoint.
Always contribute the maximum amount every year to your 401K. All contributions are tax deferred and many companies have a matching program which equates to FREE MONEY!
Consider spousal Individual Retirement Account's (IRA's), and/or maximizing your deductible contribution to an IRA. Contributions can be made to an IRA and deducted as long as they are made by the due date of your return. Therefore, your tax preparer can determine your maximum deduction while compiling your return and if you are lucky enough to get a refund, you can use that to offset your IRA contribution.
If your company offers a “cafeteria plan” you should consider participating at maximum allowable levels. Cafeteria Plans are a type of employee benefit plan that allow participants to choose from a variety of benefits. Contributions to cafeteria plans are generally taken out of your payroll as pre-tax deductions and are not usually subject to Social Security and Unemployment taxes. Examples of benefits often available in a Cafeteria Plan include group-term life insurance, flexible spending accounts, and health care benefits among others.
Charitable contributions are a wonderful way to lower your tax liability and feel good at the same time. Start keeping receipts in a file for the year and remember you are also required to obtain evidence of non-cash donations.
Does your company offer equity compensation? Asking for equity as a portion of your compensation or bonus compensation in the form of equity verse cash may defer taxable income if there is qualified plan in place.
Energy efficient home improvements may offer rebates as well as tax credits or deductions. If you are considering any projects, look at state and federal websites to determine if you are eligible for rebates and/or tax savings.
Planning to go back to school or saving for your childs' education? Use a tax deferred plan such as a 529 Plan. Contributions to 529 education plans are not deductible; however the money (both principal and interest) comes out tax free as long as the beneficiary is attending a qualified secondary education program. The accounts can also be rolled over to another beneficiary. Therefore if you are fortunate enough to have a full scholarship for one of your children, their savings account can be rolled to another of your children or saved and eventually rolled to a grandchild.
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