April 18 is fast approaching and with it, the deadline for filing your 2010 income tax return. While the majority of your 2010 tax figures are already in place, there are still a few things to consider before the due date.
Last Minute Tax Savings
Individuals qualifying for Individual Retirement Accounts have until April 18 to contribute to the account and take the deduction on their 2010 income tax return. To qualify, you must have earned income. Additionally, if covered by a retirement plan at work, you must meet certain phase-out requirements, depending on your filing status.
If you qualify, the maximum deduction for your IRA is $5,000 ($6,000 if you are 50 years old or over). If your spouse qualifies, the maximum deduction is $10,000 ($12,000 if both you and your spouse are 50 or older).
The IRA can be established any time up until April 18, 2011.
Simplified Employee Pensions are similar to IRAs, but they are established and funded by employers. They can be set up and funded anytime up to the due date of the return (including extensions). They are excellent retirement vehicles for sole proprietors in that you can contribute up to 25 percent of your self-employment income or a maximum of $49,000. Their biggest drawback is that you must contribute the same percentage to employee SEPs that you contribute to yours.
Assume you want to contribute 25 percent of your self-employment income to a SEP. Also assume that you have three other employees who qualify under the plan and their total combined income is $100,000. In addition to your contribution, you would have to contribute a total of $25,000 to your employees’ accounts. For this reason, you need to think long and hard before establishing a SEP if you have employees.
Health Savings Accounts and Medical Savings Accounts are tax-advantaged methods you can save within to cover the cost of medical expenses. Most medical plans require you to pay a deductible, so if you are covered by a high-deductible plan, you can establish an HSA. The idea behind the health account is to reduce your overall cost by allowing you to increase your deductible, which typically reduces the premium. Instead of spending the premium savings, you deposit the savings into an HSA (the deposit is deductible just like in an IRA). If you need money to pay qualified medical expenses, you can use the funds in the HSA.
The amount you can contribute to the HSA each year is limited to the lesser of your deductible or $3,050 for individuals (and $6,150 for families). Assuming you qualify, you have until April 18 to establish and fund an HSA. In addition to the maximum amounts above, persons age 55 and older can make catch-up contributions of $1,000.
A Few Other Thoughts
In addition to last minute tax savings tips, be aware of the rules surrounding extensions. While you can obtain an extension of time to file your return, there are no extensions on due dates for tax payments. If you believe you will owe tax, make every effort to accurately estimate the amount due. Failure to pay it by the April 18 deadline will subject you to interest and penalties when the return is finally filed.
Additionally, don’t forget the requirements for state extensions. Some states accept federal extensions as valid for state purposes and some do not. Whatever the case may be where you file, all states require you to pay any tax due by the original due date.
As we near the filing deadline, you might still have one or two tactics available to minimize your tax liability. Give us a call and let us help search through your options.
Have a great spring season.