Financial Abundance

While it is important to execute year-end tax saving strategies to minimize your taxes in 2009, your greatest opportunity for tax savings comes from advanced tax planning before the start of 2010.  There are several areas where advanced planning will provide a significant amount of tax savings in the year ahead.  Here are just a few:

Purchasing a home – Congress has extended the $8,000 refundable tax credit to anyone who closes a “first home” by the end of June 2010.  This “first home” credit applies also to anyone who has not owned a house for the past three years.  If you have a home that you have owned for at least five years, you are eligible for a refundable tax credit of $6,500, as long as your new home costs less than $800,000.  To qualify for either option, income cannot exceed $225,000 for joint tax filers.

A refundable tax credit provides for a full tax refund of either $8,000 or $6,500, even if the taxes that you owe are less than the refund amount.  As an example, suppose that you owe taxes of $5,000 and are receiving a refundable credit of $8,000.  With a refundable tax credit, you pay no taxes at year end and the treasury will send you a check for $3,000.

If you have not owned a home in three or more years or are thinking about moving after living in your home for at least five years, these subsidies can help you buy a new home.  Just be sure to sign a purchase agreement by April 30 and that closing occurs by June 30.

Health Savings Accounts – If you choose a qualified High Deductible Health Plan (HDHP) for your family’s health insurance in 2010, you will be able to make a tax deductible contribution of $5,950 to your Health Savings Account.  Not only are these funds immediately deductible against 2010 income, when you use these funds for future health care, no taxes are due on these funds or their income.

HSAs combine an immediate tax deduction (like an IRA) with the advantage of never paying taxes on these funds (like a Roth IRA), when the HSA funds are used for health care services.  On an after tax basis, HDHP insurance plans, combined with fully funded HSAs are often the most cost effective approach to providing health insurance.

Sales Tax Deduction – For the past few years, Congress has allowed for taxpayers to choose between deducting their state and local income taxes or their annual sales taxes. In states such as Colorado, most people deduct the income taxes.  However, if you are retired or having a low income year, it may be more advantageous to deduct state and local sales taxes instead of income taxes.

My approach is to have a large jar in the pantry into which my wife and I put every receipt with at least $1 in sales taxes.  At the end of the year, you might be surprised to find out how much you pay in sales taxes.  As an example, if you buy $80,000 in taxable items, you pay $6,800 with Colorado’s 8.5% sales tax,.  With Colorado’s 4.64% income tax rate, $145,000 of taxable income is required for the same $6,800 deduction.

IRS provided sales tax tables vastly understate actual sales tax payments.  For the sales tax alternative to succeed, you must save your sales tax receipts.  However, a little effort at the end of the year could save hundreds of dollars in federal income taxes.

Other tax savings approaches include maximizing your retirement plan savings, properly funding your flexible spending account (FSA), gifting strategies, etc.  To get more detail on these and other tax strategies, check out my book, Financial Abundance Guide, which is now available free on my website.