CHICAGO — The filing deadline for 2011 federal income taxes is not far off, but you still have time to make sure you’ve done everything you can to keep Uncle Sam’s paws off as much of your money as possible. Here are some last-minute ways to do that by reducing your 2011 income tax bill:
One of the most important tax-savings steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plan. If you haven’t done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2011, you may put as much as $16,500 into a 401(k), 403(b) or 457 plan. If you’re over age 50, you may add an additional $5,500.
Every dollar you contribute means you will pay less income tax. Except for Roth IRAs, all contributions to tax-deferred retirement plans are tax-deductible in the tax year for which you make your contribution.
If you can’t come up with the maximum, bump up your contribution as much as you possibly can. It may seem painful now, but you’ll benefit greatly in the future.
You must make your contributions no later than the time you file your 2011 return, and you may make deposits for 2011 only in accounts that were opened prior to Dec. 31.
Did you make any large purchases in 2011? You still have a choice of deducting either your state and local income taxes or state and local sales taxes, but not both. If you live in a high-tax state such as Ohio or Massachusetts, you’re probably better off continuing to take the deduction for state income and property taxes. However, for residents of states that have no separate income tax, such as Florida and Texas, the sales tax deduction can significantly reduce federal taxable income.
Can’t find your sales receipts? Not to worry: the IRS has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. Type “Estimated State Sales Tax” in the search box here.
If you’re dishing out big bucks for college tuition, you might be able to get some of them back. There are two education credits and a tuition deduction for which you may be eligible.
(A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percentage of every dollar you deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. If you're in the 28% bracket, your $100 deduction will reduce what you owe by $28.)
The Hope Scholarship Credit is for taxpayers whose children (or themselves) are in their freshman or sophomore years in college. It offers a maximum tax credit of up to $1,800 for 2011. The Lifetime Learning Credit offers the possibility of a credit of up to 20% of the first $10,000 in tuition you pay, for a maximum credit of $2,000.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction.
Details and earnings limitations on education deductions and credits are complex, so it’s best to check with your tax adviser to see of you are eligible.
And don’t forget the Child Tax Credit, which has been extended through 2011-2012. It allows you to claim a maximum $1,000 per qualified child. Remember, a tax credit is a direct subtraction from your actual taxes owed, which is much more valuable than a deduction.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.
Wednesday: Often-overlooked deductions...