Reduce Your Tax Bill Now

The plethora of tax credits and deductions has us all confused, but it is important to take every available credit and deduction. There are plenty of ways to save on your taxes throughout the year. It is something we must think about all year long. Those that wait until it is time to file their return have missed many tax saving opportunities.

Contribute to a 401K or other company retirement plan.

The IRS permits contributions of up to $16,500 ($22,000 if you are 50 or older) for 2010. For most people, contributing to their company retirement plan is the one thing that will provide the most tax savings. Contributions are not included in taxable income.

Contribute to a Traditional or Roth IRA.

For those with no retirement plan through their employer, contributions up to $5,000 ($6,000 for those age 50 and older) are permitted for the 2010 tax year. Contributions to a Roth IRA are not deductible from income, but when the money is withdrawn upon retiring, or after reaching age 59 1/2, the withdrawals are tax-free. Subject to income limitations, it still is possible to deduct contributions to a Traditional IRA while participating in your retirement plan at work depending on your income. Income limitations are higher for Roth contributions while participating in an employer-sponsored plan.

Saving on energy will save on your tax bill.

Unless Congress extends this credit, 2010 is the last year to receive a credit for home improvements that reduce energy consumption. The credit is worth 30% of the cost of new windows, doors, insulation, high-efficiency furnaces, water heaters and central air conditioners up to a maximum of $1,500. The credit applies to both 2009 and 2010, so if you took the maximum last year, you will not be able to get anything in 2010. However, if you did not make any eligible home improvements in 2009, this is one credit you don't want to miss.

Take advantage of the Retirement Savings Credit.

This credit is available for singles with incomes up to $27,750, married couples with incomes up to $55,500, and heads of household with incomes up to $41,625. These income limitations will probably be increased for the 2010 year, but the IRS has not yet released that information. The Retirement Savings Credit can be as much as $1,000, based on up to 50% of the first $2,000 contributed to an IRA or to an employer-sponsored plan. The Retirement Savings Contributions Credit is in addition to any other tax benefits you may receive from the retirement contributions. Contributions to a regular 401(k) or 403 (b) plan are not subject to income tax until withdrawn from the plan.

Use pre-tax dollars to pay for child care.

Many companies offer section 125 cafeteria plans that permit tax-free payroll contributions that then can be withdrawn to pay for child care. Both income and Social Security taxes can be avoided when using such a plan. If it is available, you should use it to attain significant tax savings.

Don't miss claiming Education Credits.

Up to $2,500 is now available for the Hope Credit and it is now available for the first four years of post-secondary education. Part of the credit is now refundable. Even if no tax is due, 40% will be returned to the taxpayer. Income limitations have been raised for the Hope Credit, The Lifetime Learning Credit and the Tuition Deduction.

The Tax Code becomes more convoluted each year. Huge tax savings can be achieved by planning and spending wisely throughout the year. Those that plan ahead reap the benefits when filing season comes along.