Last Minute Tax Tips for Last Minute Filers

April 13, 2011

In case you haven’t heard, the 2010 tax filing day has been extended until Monday, April 18, 2011.  That means taxpayers get one extra weekend to find as many credits and deductions as they can before sending their returns off to the IRS.  Now it’s not often that waiting until the last minute pays off, but consider these tax tips a reward for your procrastination:

Tip #1 – Contribute to an IRA

You may contribute up to $5,000 ($6,000 if you are age 50 and above) to an IRA for 2010.  Contributing to an IRA has a potential triple advantage.

  • The first advantage is simply getting a head start on retirement. Our research suggests that only 15% of employees know they are on track to reach their retirement goals, so anything you can do now to save for retirement will help.
  • The second advantage is the potential tax benefits. Contributions to a traditional IRA are deductible if your modified Adjusted Gross Income (AGI) is below certain limits (see Can I deduct my contributions?).  So for example, if a single tax filer with $50,000 in modified AGI contributes $5,000 to a traditional IRA, they could reduce their tax bill by up to $1,250.  Contributions to a Roth IRA are not deductible, but they offer tax-free earnings if held for five years AND until age 59½.  There are income limits, but recent legislative changes have made it possible to contribute to a Roth IRA even if your income exceeds those limits (see my October 20, 2010 blog for details).

Extra tip: Use your tax refund to make a Roth IRA contribution.  Even if you have already filed your tax return for 2010, you can make a nondeductible contribution for last year.

  • The third advantage is the potential to qualify for a tax credit. A Retirement Saver’s Credit of up to $1,000 ($2,000 if married filing jointly) is available to taxpayers with AGI below certain thresholds.  Complete Form 8880 to see if you qualify for this credit.

Tip #2 – Maximize Itemized Deductions

Most homeowners are familiar with deductions for mortgage interest and property taxes, but there may be additional items that are deductible for homeowners and non homeowners alike.

  • Premiums paid on a qualified Long-term Care insurance policy may be treated as unreimbursed medical expenses. Unreimbursed medical and dental expenses are deductible only to the extent that they exceed 7.5 percent of your AGI.
  • Taxpayers may choose whether to deduct state income tax or state sales tax. Taxpayers who made large retail purchases last year may benefit from selecting the sales tax deduction.
  • Charitable contributions are deductible, but cash contributions of $250 or more require a statement from the charitable organization. Also, if claiming more than $500 in noncash charitable contributions, such as donated clothes or toys, you must attach Form 8283 to your return.
  • Lottery tickets and other gambling losses are deductible, but only up to gambling gains.
  • You may claim a home office deduction only if the work space is used exclusively for work. Mixing business with personal use of the space will disqualify this deduction.
  • Certain miscellaneous and unreimbursed job related expenses are deductible, but only to the extent that they exceed 2 percent of your AGI.

Tip #3 – Claim your credits and deductions based on which one has the greatest benefit

Tax deductions lower your taxable income, while tax credits reduce your tax bill dollar for dollar.  In some instances you will have the option as to which one you take.

  • Parents may pay for child and dependent care expenses using tax-free dollars from a flexible spending account, or pay with after-tax dollars and claim a tax credit.  For taxpayers in lower tax brackets, the tax credit may be more advantageous.
  • Taxpayers who pay for tuition and fees with after-tax dollars may claim a tax credit or deduction. Credits are usually preferential for taxpayers in lower tax brackets.

Our tax system is voluntary.  That doesn’t mean we choose whether or not to pay income taxes, but rather we choose which credits and deductions to claim when we file.  The IRS isn’t going to call us up to tell us if we forgot to claim something.  If you still aren’t ready to file your tax return by the 18th you can always file for an extension.  Just remember, an extension gives you more time to file, NOT more time to pay your taxes.  If you think you are going to owe the IRS, make sure you send in a payment along with your request for an extension.