Year-End Tax Planning Tips

We still don’t know what is going to happen to the tax rates after December 31st, but most likely they will go up. So how do you plan ahead to try to save taxes both this year and next? Here are a few ways that are generally effective no matter where taxes are headed:

For Business Owners:

Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.

Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.

Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?

Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.

For Individuals:

Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.

Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.

Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.

Remember, a little planning can go a long way!