Tax-Advantaged Investments
Are you concerned about your tax liability for 2011? Consider these strategies to help lower your tax bill, maximize your pretax profit and boost your after-tax bottom line.
Invest for the Long Haul
The IRS offers a strong incentive for investors to hold shares for at least a year, taxing realized capital gains at a favorable rate of 15%, compared to ordinary rates as high as 35% for investors who sell shares within the year.
Maximize 401(k) Contributions
401(k)contributions reduce your taxable income and provide tax-deferred growth. You only pay tax when you take money out. Plus, many employers offer a match for employee contributions up to a certain percentage. For tax-year 2010, you can invest up to a maximum of $16,500. Those age 50 or older may make an additional catch-up contribution of up to $5,500 for a total of $22,000. Starting in 2011, the maximum 401(k) plan contribution will be adjusted for cost-of-living increases.
Start an IRA
No 401(k) account? You may be eligible to open an Individual Retirement Account (IRA). Like a 401(k), contributions reduce taxable income and tax on earnings is deferred until withdrawn.
Open a Roth IRA
While contributions do not lower your tax liability, interest and dividends are not taxed upon withdrawal as long as you follow the rules. You can contribute a maximum total of up to $5,000 between your traditional and Roth IRAs, plus those over 50 can are allowed an additional catch-up contribution of $1,000.
Save for College
Invest in a young person’s future with a Section 529 plan. Though contributions are not deductible on your federal tax return, the investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free (non-qualified distribution of earnings will be subject to income tax and a 10% federal tax penalty).
If you haven’t already done so, arrange a review of your investment portfolio, and see your tax professional for more information on tax-advantaged investments. Consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. Obtain an official statement from the issuer or your financial advisor, and read the official statement carefully before you invest.
Organizing Tax Records
Good recording keeping saves time and helps reduce frustration at tax preparation time. With the holidays behind us, why not get a jump start on organizing your 2010 tax records? Whether you plan to prepare your own taxes, or to enlist help from a tax professional, you need to gather and organize these records.
Income Statements
Employers must send W-2s and 1099s by January 31st, so keep an eye on the mail. File them away as soon as they arrive.
Expenses
Proof of payment for personal or business credits or deductions, including sales receipts, invoices and cancelled checks. Some examples are home improvements that qualify for the Residential Energy Property Credit, or business-related expenses like gas receipts and mileage from a job search.
Investments
Brokerage and mutual fund statements, Forms 1099, Forms 2439, and annual statements for 401(k) and IRA accounts.
Home/property-related records
Closing statements, purchase and sales invoices and insurance and property tax records.
Medical Records
Receipts for co-payments and out-of-pocket expenses for medical services, lab tests and prescription drugs. Annual statements of your contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs).
Child Care Expenses
Receipts for payments to your child care provider; FSA statements if enrolled in a flexible spending plan and will use the dependent care reimbursement to lower taxable income.
College/educational Expenses
Receipts for tuition, books, computer software or technology that could qualify for the tax incentives for higher education.
Charitable Contributions
Receipts and/or cancelled checks for donations to qualifying charities. Receipts and itemized lists of donated household goods and clothing. Sales receipts, mileage records and transportation expenses (parking or tolls) incurred while volunteering for a charitable organization.
Change of Name or Address? Notify the Social Security Administration, your employer, and any financial institutions where you hold accounts.
This information is general in nature and should not be construed as tax or legal advice. INVEST Financial Corporation does not provide tax or legal advice. Please consult your tax and/or legal adviser for guidance on your particular situation. The information in this report has been obtained from sources considered to be reliable but we do not guarantee that the forgoing material is accurate or complete. This article is not an offer to sell or a solicitation of an offer to buy any security, and may not be reproduced or made available to other persons without the express consent of INVEST Financial Corporation. Securities, advisory services and insurance products offered through INVEST Financial Corporation, member FINRA, SIPC, a Registered Broker Dealer and Federally Registered Investment Adviser, and affiliated insurance agencies. 0812-84177
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