The following is a guest post from NerdWallet.com, a website that helps educate consumers about credit and find money-saving deals on credit cards.
15th 18th looming, tax strategies are on the minds of many Americans. I recently had the chance to chat with Dominique Molina, co-founder of Certified Tax Coach regarding tips and advice the average person on the street can implement to make sure their family’s tax strategies are as strong as possible. Here’s a quick rundown on what she had to say.
Personally, I don’t know why any couple wouldn’t have some sort of small business with all of the potential tax benefits, but that’s another article entirely. Molina points out however, that certain expenses are deductible under some business formats, but not others. For example, health care expenses account for a large portion of many business budgets, but fringe benefits are not deductible within an s-corp for its owners. So it pays to look around and see which business entity leaves you keeping more of your own cash at the end of the tax year.
Social security tax credit:
There’s currently a credit allowing a two percent reduction in withholding that applies to both business owners and employees. And it’s applicable on incomes up to $106,800. So if you have the capacity to earn more this year, it can be worth it to take advantage of the additional savings, according to Molina.
Waiting until the filing deadline to think about tax strategies is a mistake:
While what’s done is done as far as your spending for 2010 is concerned, Dominique stresses that planning ahead and taking a more analytical approach with your family’s tax plan is a smarter move. At this time of year says Molina, one of the only tax strategies left for folks to use is a last-minute retirement contribution. Be warned however, that this can come back to haunt you later on if you haven’t planned ahead. Molina calls the popular end-of-the-year retirement fund strategy used by many tax pros as an easy way to appease customers with a “ticking tax time bomb”. Why? Because you’re trading a lower tax bill now for a higher rate years later when you have a higher income and tax rates increase. Additionally, she says, these retirement accounts often have inflexible withdrawal parameters.
Be careful about using the delayed tax option on last year’s Roth conversions:
For 2010, the earning limits for converting cash into the popular Roth IRA accounts was increased. But you have to pay taxes on the amount you convert before you can put it in the account to grow tax free. To sweeten the pot, taxpayers were offered an automatically delayed payment option to handle that upfront tax payment in a split between their 2011 and 2012 tax filings. If you don’t opt out of that automatic delay says Molina, you lose the ability to pay at the lower 2010 tax rate, provided you’re confident that your tax rate will go up in the next two years. So if you have extensive losses for 2010, or are pretty sure your earning level will be rising drastically in the next two years, then you may want to seriously consider paying that tax bill now to save money.
Tax strategies play an important part in your family’s wealth-building plan. Put these ones to use if they fit your situation, and sit down with a proactive tax pro to determine the best plan for this year as well as long term.