Before you know it, the tax-filing deadline will be here again.
Wouldn’t you rather be watching your favorite television show — or doing something else that you enjoy — on the evening of April 15 instead of rushing through your tax forms to make a midnight postmark?
By organizing your tax information now, you might be able to relax a bit in April.
Organize your documents
Start by organizing all the documents that pertain to your 2009 taxes. You’ll typically receive these types of documents by year-end or no later than Jan. 31 of the new year.
This list includes much of the information the average taxpayer will need, although certain items might not apply to you.
Sources of income
Form W-2 from employers.
Receipts from odd jobs, rental property or other income.
Evidence of pension or disability payments.
Proof of unemployment compensation if you collected it.
Investment income
Documentation of your contribution to an individual retirement account. You might be able to deduct your contribution to a traditional IRA if you meet income thresholds.
Form 1099 — which details yearly investment gains or losses — if you own mutual funds in taxable accounts.
Year-end statements from brokerage accounts in which you hold stocks or bonds.
Year-end statements from companies in which you own stock and receive dividends.
Year-end bank statements that detail interest income.
Potential deductions
Documentation of mortgage interest.
Evidence of charitable contributions.
Receipts for payments of college tuition and student loans (if you meet income thresholds).
Paperwork detailing educational expenses for yourself or a family member (if you meet income thresholds).
Documentation of job-hunting expenses.
Evidence of unreimbursed business expenses, such as subscriptions to trade publications or membership in professional associations.
Strategize to minimize your tax bite
Once you have gathered the necessary paperwork, start thinking about ways to reduce your 2010 tax bill. The tips below might help.
Make the most of tax-advantaged accounts
If you contribute to an employer-sponsored retirement plan, a traditional IRA or an annuity, remember that earnings on your contributions are allowed to grow tax-deferred until withdrawal. At that point, distributions will be taxable as income at then-current rates.
With a Roth IRA, withdrawals are tax-free if you meet the requirements for a qualified distribution.
Restrictions, penalties and taxes might apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRAs for five years before tax-free withdrawals are permitted.
Keep in mind, however, that early withdrawals from a qualified retirement plan or annuity might be subject to a 10 percent penalty tax.
Offset investment gains with losses
At times, you might be able to use losses in a taxable investment portfolio to help offset capital gains you realized by selling assets at a profit.
For example, if you sell investments that have lost money, you might opt to deduct up to $3,000 in investment losses from that year’s tax return. Additional losses can be carried forward and used to offset future capital gains.
Understand short- and long-term capital gains
If you have an investment and hold it for at least one year before selling, you’ll pay a maximum federal tax of 15 percent on capital gains. Keep it for less than one year, and you’ll pay regular income taxes — up to 35 percent.
Finally, keep in mind that tax rules are changing constantly and that investments are not the only aspect of your life that deserves special attention come tax time. For more ideas on how to reduce taxes in 2009 and 2010, consider speaking with a tax professional.
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