As tax season approaches we would like people to be as informed as possible, so here are five questions you should ask yourself before filing taxes this year.
The following information is adapted from Wells Fargo’s Tax Resource Center, which provides general information on filing taxes, from the documents you will need to advice about your refund or payment.
1. Have you donated?
Giving money or property to a qualified charity usually counts as a deduction if you file it correctly. You must attach IRS Form 8283 if your total non-cash contributions exceeds $500 and you will need a written appraisal of the property’s fair market value for non-cash donations worth more than $5,000. Also remember that your excess donations in 2010 will carry over to the new year.
2. Have you helped the Environment?
If you installed solar panels, insulation, energy efficient roofing, water heaters, storm doors, or even a home windmil you can claim a 30% credit — up to $1,500 on qualified improvements. There are also benefits for hybrids, electric cars, bus and train riders, carpoolers and bicycle commuters.
3. Have you contributed to a 401(k) or IRA?
Contributing to your retirement account is a great way to save on taxes. If you have a 401(k), 457, or 403(b), you can contribute up to $16,500 per year ($22,000 if you’re 50 or older), and if you own an IRA, you can contribute up to $5,000 per year ($6,000 if you’re over 50). For 2010, you have until the filing deadline on April 18 to supply to your IRA or even open a new one. There are limitations that depend on your income level, so always consult a tax advisor first.
4. Does anyone owe you money?
An often overlooked tax break; it’s called a non-business bad debt. If you were owed money and gave up on ever seeing it again, it gets treated as a short-term capital loss in the year you determine the debt is completely worthless. Furthermore, this means you can potentially use it to offset capital gains and up to $3,000 of ordinary income. Put this on Schedule D of your return.
5. Have you sold securities during the year?
It’s never too soon to start thinking about how the losses generated in your portfolio can offset the existing or year-end capital gains. Tax-loss harvesting is the action of selling your losing securities to offset your taxable gains. If you sold securities of the same stock at different times and different prices, then be sure to follow the wash-sale rule, which disallows deductions if you purchase the security within 30 days of selling it. Not only will you save money, but you’ll finally sell off that loser that’s been underperforming in your portfolio over the years.
There are other ways to save on your taxes, and with your tax breaks.