Here’s the problem with tax planning.
For the first three months of the year, people are so stressed out by reading instruction booklets and looking for those lost receipts and then filling out their tax forms for the previous year that they want to go at least two months without EVEN THINKING ABOUT TAXES after the filing deadline.
Then before you know it, summertime is here. Family vacations, baseball games, cookouts on the patio and a long snooze in the hammock – and really – who can think about taxes with all that fun stuff going on?
Well I sure can, gosh darn it. And so before this year is more than half over – and by then you’ve already missed out on some good opportunities to save on your taxes – we’re going to talk about tax tips and strategies for 2011.
The tax legislation passed last December (which effects income earned in 2011) was not much more than a placeholder. The leadership in both parties was simply not willing to engage in the knock-down, drag-out partisan brawl that some members of their respective parties wanted, and so there wasn’t a lot of change from 2010 to 2011.
But there are some changes, and you need to know about them.
Big Thing #1 is that the lower capital gains tax rates are still in place. So if your income is relatively low this year – either because you changed jobs, just graduated from college or just retired – you might want to consider cashing in some of those capital gains this year. No promises as to what’s going to happen in 2012.
If you’re in the 15% tax bracket or lower, you don’t have to pay ANY capital gains on assets held long term. What does this mean? Let’s say you were laid off this year and your income has taken a significant hit. If you’re married and your combined income for 2011 is less than $69,000, then you might want to cash in the Apple stock you bought back in 1983 because you won’t have to pay any taxes on the capital gain.
It’s free money.
Big Thing #2 is the Residential Energy Tax Credit. Despite some speculation that this credit would be dropped at the end of 2010, it has lived on to give taxpayers credit for home energy efficiency for another year. But there are two big warning flags with regard to this credit.
The first is that while the credit survived, it’s been significantly scaled back from previous years. In 2009 and 2010, you could receive 30% of the installed cost of certain energy efficient home improvements back as a tax credit, up to a total of $1,500. The new credit is much smaller.
For improvements like replacement windows, the credit it limited to 10% of the cost and is limited to just $200. The credit for installing a high efficiency gas furnace is just $150 – I had several clients who received the entire $1,500 credit for just a furnace alone.
The second thing is that the new credit has a total lifetime limit of $500, so if you have already received $500 or more from the previous energy credit, you’re completely out of the running to take advantage of the new credit.
Keep this in mind when you’re pricing home improvements, because the odds are that the guy at Home Depot isn’t a tax expert and he’s going to tell you all sorts of incorrect things about your potential tax savings. The fact is, you’re going to save money on your energy costs (no small thing these days) but you’re NOT going to save a lot on your taxes.
For more information on the energy credit, go to www.energystar.gov.
Big Thing #3 is the American Opportunities Credit. I don’t know why this isn’t getting more attention because it’s a whopping huge credit that probably won’t last forever, so you really should take advantage of it. Simply put, it provides a $2,500 year tax credit for every child that you’re putting through college.
Every year. For four years.
Let me do the math – That’s $10,000 in assistance to pay your kid’s tuition. You say you have twins? Make that $20,000. And if you don’t have a tax liability large enough to need your annual tax credit, the American Opportunities Credit will actually create a refund where none had existed before.
Sweet!
We’ll take more about ways to save on your taxes in 2011 as the year goes on, but these three can provide some big savings if you’re able to take advantage of them.
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