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Last-minute ways to cut your taxes

With time running out to prepare your tax return, you may think it's too late for tax-saving measures. But you can still take steps to substantially reduce what you owe.

By MSN Money Partner Apr 9, 2012 1:44PM
This post is by Bill Bischoff of SmartMoney.

 

Although 2011 is way back in the rearview mirror, it's still not too late to make some moves that will save taxes on last year's Form 1040 and maybe on last year's state income tax return as well. Here are three possibilities:

 
1. Deduct sales taxes if you made major purchases. If you live in a state with low or no personal income taxes, be aware that Congress extended the federal tax deduction for general state and local sales taxes through 2011. Therefore, you have the option of deducting either state and local sales taxes or state and local income taxes on your 2011 return -- but not both.

 

If you chose to deduct sales taxes, most of you will have to use the Internal Revenue Service's tables to calculate your sales tax deduction. However, if you've hoarded receipts from your 2011 purchases, you can add up your actual sales tax amounts and deduct the total if that gives you a better answer.

 

Even if you're forced to use the IRS-provided table, you can still deduct actual sales taxes from major 2011 purchases -- for things like motor vehicles (including motorcycles, off-road vehicles, and RVs), boats, aircraft and certain home improvements -- on top of the predetermined amount from the table. The IRS has details. (Post continues after video.)

2. Establish an SEP. If you're self-employed and have not yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension, or SEP. Unlike other types of small-business retirement plans, an SEP can be created this year and still generate a large deduction on last year's return.

 

In fact, if you extend your 2011 return to Oct. 15, you'll have until that late date to take care of the paperwork and make a deductible contribution for last year. The deductible pay-in can be up to 20% of your 2011 self-employment income or up to 25% of your salary if you worked for your own corporation. The absolute maximum amount you can contribute for the 2011 tax year is $49,000.

 

To establish a SEP, go to your bank or brokerage firm and fill out Form 5305-SEP. It takes five minutes. But don't jump the gun. You may not want a SEP if you have employees, because you would probably have to cover them and make contributions to their accounts. That might be too expensive. Bottom line: if you have employees, don't start a SEP without consulting your tax adviser.

 

Tax savings example: If you're in the 28% federal bracket, a $30,000 SEP contribution could lower your 2011 tax bill by a cool $8,400 (plus any state income tax savings). In fact, the tax savings could finance a big chunk of your contribution.

 
3. Make a deductible IRA contribution. If you've not made a deductible contribution for the 2011 tax year to your traditional IRA, you can do so between now and the tax-filing deadline of Tuesday, April 17, and claim the resulting write-off on your 2011 return.
 
You can potentially make a deductible contribution of up to $5,000 -- or $6,000 if you were 50 or older as of Dec. 31, 2011. Your spouse can do the same. You must have enough earned income last year (from jobs, self-employment or alimony received) to equal or exceed the amount you contribute to IRAs for the 2011 tax year.
 
The only catch: Deductible IRA contributions are phased out (reduced or eliminated) if last year's income was too high. The good news: The phase-out ranges are much higher than they were just a few years ago.

 

Tax savings example: If you're in the 25% federal bracket, a $5,000 deductible IRA contribution between now and April 17 would save you $1,250 in 2011 taxes (plus any state income tax savings). If you and your spouse are both over 50, two $6,000 contributions (a total of $12,000) would save $3,000 (plus any state income tax savings).

 

Ground rules for deductible IRAs:

  • You, and/or your spouse if you're married, must have 2011 earned income at least equal to what you contribute for 2011.
  • If you turned 70½ last year, you can't make any deductible contribution.
  • If you're unmarried and were covered by a retirement plan in 2011, your eligibility to make a deductible contribution for last year is phased out with an adjusted gross income (AGI) of between $56,000 and $66,000.
  • If you're married and both you and your spouse were covered by retirement plans in 2011, your eligibility to make a deductible contribution for last year is phased out with a joint AGI of between $90,000 and $110,000. The same goes for your spouse.
  • If you're married and only one spouse was covered by a retirement plan in 2011, the covered spouse's eligibility to make a deductible contribution for last year is phased out with a joint AGI of between $90,000 and $110,000. The non-covered spouse's eligibility is phased out with a AGI of between $169,000 and $179,000.

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