Top Five Things to Do Today to Reduce Your Taxes in 2011

Pay yourself first! Increase your elective contribution to your employer’s qualified retirement plan by the end of the year to reduce your taxes.  As an added bonus, if your adjusted gross income (AGI) is less than $28,251 for a single taxpayer ($56,501 for married taxpayers filing a joint return), you may be eligible for the “savers credit” up to $1,000 ($2,000 for married taxpayers filing a joint return).

And if you turned 50 in 2011, congratulations on making it to the mid-century milestone.  Mark the occasion by contributing an additional $5,500 to your employer’s 401k plan, up to an annual maximum of $22,000.  For SIMPLE plans, the “catch-up” is $2,500, up to an annual maximum of $14,000.

Think green! If you own your home, replace drafty windows and doors, add insulation to the attic, and update your HVAC or water heater before the end of the year to be eligible for up to $500 in tax credits which reduce your taxes dollar-for-dollar.   For even more “bang for your buck”, add solar energy or geothermal heat pumps for a 30% tax credit.

Give until it hurts (the IRS, that is)! If you are 70 1/2 or older, you can have your required minimum distribution (RMD) sent directly to your favorite charity.  Not only do you save income taxes on the RMD, but less of your social security benefits may be taxable.  The down side is that you lose the charitable deduction, but the knowledge that you won’t be paying taxes to Uncle Sam on your RMD should ease the pain.

Give until it hurts (the IRS, that is), Part II! Gifts of appreciated stock are a great way to satisfy charitable pledges and are tax-efficient as well.  As long as you’ve owned the stock more than one year, you can deduct the fair market value of the stock on the date of the gift.  The value of the appreciation while you held the stock simply vanishes into thin air, never to be taxed as capital gains, while you bask in the glow of your good deed.

An honest day’s work never hurt anyone! Put your kids to work in the family business, pay them a reasonable wage for their labor, and get a tax deduction.  Unless you pay your child more than $5,700, your child most likely will not have to pay income taxes.  To amp up the savings even more, deposit your child’s wages to his or her Roth IRA account up to a maximum annual contribution of $5,000!

Invest in education! There are many incentives for higher education, from tax credits for tuition paid to tax deferral for contributions to college savings plans to state tax deductions for contributions to the Maryland college savings plans.  While nothing can ease the pain of a $30,000 tuition bill, these incentives may help.

And now for the fine print – Please contact your tax advisor at RS&F for more information and allow us to tailor our tax-saving recommendations to your individual situation.  But keep in mind that time runs out at midnight on December 31st.

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