Next year's income taxes are in limbo and many Americans are wondering how best to prepare for the approaching tax season.
The latest plea from Uncle Sam may not provide much help.
"I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011," wrote Internal Revenue Service commissioner Douglas Shulman about the risk that Congress will fail to pass legislation before the end of the year. The delay could hold up refunds for 25 million people.
With deductions for teacher expenses and deductions for tuitions and fees tangled up with the hotly debated Bush tax cuts, the IRS is seeking to get the ball rolling on some tax incentives. "These tax provisions can be distinguished from other pending tax legislation because they are so critical to ensuring that taxpayers experience a smooth taxing filing season system," wrote Shulman.
Are you looking for clarity before 2010 ends? There's no guarantee, but "there's some tax moves that are good despite what Congress will do with tax laws," says Bob Meighan, a vice president at the tax software company TurboTax. "Taxpayers can invest in an IRA account until April 15 or invest in a 401K until December 31."
Here are some tips on what you can do:
Retirement Funds: An investment in your future is suggested by most tax experts. A retirement plan is an "easy deduction," says Patrick Cox, CEO at TaxMasters Inc. If your company is not participating, you should attempt to participate if at all possible. While there are some companies that require a wait time or require employees to wait until open enrollment, "a lot of companies will let you start at the end of the year or even on the next paycheck," says Cox. The money placed in a retirement account is typically not subjected to income taxes.
Charitable Giving: "Not only are donations good for your taxes, they're good for society as a whole," says Meighan. And, while there may be no large tax benefit for some donations, there are social benefits to making donation to charitable organization.
"Computers and cell phones can be useful for training or charitable focuses," says Cox. "It doesn't have to be an iPad. You're entitled to fair market value for clothes and furniture, among other things. Those are good things to take care of by the end of the year." Taxpayers can also deduct any out-of-pocket expenses for charitable causes, which includes everything from mileage for travel to taxis or parking expenses.
Choose Stock Donations Over Cash: "If you're thinking about making a large cash donation, you might want to think about using stock in a company that has done well," says Cox. "Make a donation of those shares because if you sell the shares to make a large donation you have to pay the taxes on the profit. If you donate the shares then you receive the fair market value of the stock." Check IRS.gov for the rules regarding stock giving.
Energy Tax Credit: If you're adding solar panels, caulking, storm windows or energy-efficiency improvements, you may be eligible for a tax credit of up to $1,500. For more information, check out the residential energy property tax credit.
Include Employment Expenses: "Did you have any job related expenses? Did you search for a job? If so, some of those expenses can be deducted," says Jackie Helton, a franchisee owner at BookKeeping Express, based in Tallahassee, Florida. Hang on to your receipts for everything from dry cleaning for uniforms to courses for your career, because if your company does not offer reimbursement, Helton says you may be eligible for additional deductions.
Tax Credit for Cars: In November, Ford, General Motors, Chrysler, Nissan, Hyundai and Honda all reported double-digit sales increases, according to The Associated Press. If you're buying a new automobile before the end of the year, check out possible tax credits. Some taxpayers can save on state and/or federal taxes if their new vehicle is a hybrid, electric vehicle or alternative-fuel car.
"It's important for people to understand that this is not something the dealership will deduct at the time of sale," says Philip Reed, a senior consumer advice editor at Edmunds.com, a car buying guide. "People sometimes confuse a car tax credit with consumer rebate. It's very confusing."
Just what kind of tax credit can taxpayers expect for qualified energy-efficient vehicles? For plug-in electric-drive cars, "the minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity," according to the IRS. The rules depend on the vehicle type.
Remember: Keep documentation for any items you expect to use as a deduction or a tax credit. Also, some deductions are subject to the two-percent rule, which means they must be greater than two percent of your adjusted growth income.