Tips for Managing Your Taxes

Article Contents
Take full advantage of tax deductions »
Make the most of retirement savings »
Build valuable tax credits »
Keep good records »
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Most Americans are happy to forget about taxes for another year once their returns go off to the IRS. But taxes aren’t really a once-a-year event. To take full advantage of all the deductions and tax credits that are available to you, it’s important to be stay aware of them, so you can make tax-wise decisions all year. The following overview may help you manage your taxes throughout the year.

Take full advantage of tax deductions
Tax deductions allow you to subtract certain items from your income before the tax you owe is calculated. For example,

Make the most of retirement savings
Contributions to a tax-deferred retirement account are a valuable way you can reduce current taxes. Your contributions can help your financial situation in two ways: 1) by reducing your current income subject to federal (and in many cases, your state) income tax, and 2) helping you build toward greater retirement security down the road. Taxes are due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to a 10% additional federal tax.

If you’re not taking full advantage of your tax-deferred retirement savings opportunities, consider raising your contributions just a little each year. You may be surprised that you don’t miss the extra $25 or $50 you direct toward your retirement savings plan, and it can make a difference over time.

And for 2011 only, you have an unusual opportunity to help boost your contributions — a “tax holiday.” The Social Security tax has been reduced by two percentage points through February 2012— from 6.2% to 4.2%. For example, someone earning $50,000 per year will pay $1,000 less Social Security tax in 2011. You could consider using this added income to increase your 401(k) contributions to help you invest toward your retirement goals.

Build valuable tax credits
If you qualify, tax credits can actually reduce the amount you owe in taxes with a dollar-for-dollar credit. There are many tax credits available for those who qualify. Here are some of the most common:

Qualifying for the Saver’s Tax Credit: If you contribute to a qualified retirement plan or IRA, meet income requirements (see table), are 18+ years old and not a full-time student, and are not claimed as a dependent on someone else’s tax return, you can qualify for this credit.

You qualify for the Saver’s Tax Credit in 2011 if you meet other
requirements and your income is…
Married filing jointly Head of household Other categories
(including single)
Contribution % used
for tax credit
Credit if contributions
= $2,000
$0 – $34,000 $0 – $25,500 $0 – $17,000 50% $1,000
$34,001 – 36,500 $25,501 – 27,375 $17,001 – 18,250 20% $400
$36,501 – 56,500 $27,376 – 42,375 $18,251 – 28,250 10% $200
$56,500+ $42,375+ $28,250+ 0% $0

*Income limits rise for 2012 taxes

Keep good records
Your retirement plan is required to track your contributions to your account. But you’ll need to keep good records of other items to back up your deductions and credits at tax time. Keep receipts of items such as child care payments, medical bills, charitable donations and energy-related spending.

Scanning your receipts: The IRS accepts scanned receipts as long as they are easily legible, they link back to another purchasing reference, such as a credit card bill, and are submitted within the accepted timeframe. You may want to take advantage of one of the online sites that will scan the paperwork for you and keep your data safe and accessible for a fee. Or, scan your own receipts and put them on a disk as backup for your tax return.

Learn more and take action


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