Take Advantage of 2010 Tax Law Today

I have spent nearly thirty years in accounting, for all sizes of companies and not for profits. I have never seen a tax year end with as much uncertainty as 2010. A wide variety of tax changes click in January 1, 2011 without Congressional action and others have already been included in legislation such as the President's health care reform. There is still time to take action to reduce your tax burden for 2010 and ease the bite of next year's taxes.

The Affordable Care Act, the President's health care reform package, made a huge change in the health flexible spending account. Over the counter drugs will no longer be eligible for payment or reimbursement under the various types of medical flexible spending accounts. All drugs except insulin must have a doctor's prescription to be eligible in 2010. You will no longer be able to submit the bill for aspirin, or antacid, or anti-diarrhea medicine.

TIP: Use up your 2010 FSA before the end of the year. Stock up on OTC drugs if you need to. Another thing to remember is that if you do not use up the FSA money for the year, you lose it. It does not roll over to the new year.

Most workers have some concerns about retirement. Will Social Security be there? What about my retirement plan?

This bring me to the next tax topic.

TIP: Put as much money into your retirement savings plan, 401-k or 403-b, as you can before year end. You can contribute up to $16,500 in a traditional plan and $11,500 in a SIMPLE plan. This money is tax free at this time and may actually kick your yearly income into a lower tax bracket if you are just over the break point. Remember, even if you are earning .5% on your 401-k, your tax bite would take 10-15% of that same money. Your return on retirement savings includes the taxes you legally avoided paying.

If you are fortunate to receive a bonus for 2010, use it to fund your retirement savings. Year end income, like a bonus, is the subject of my next topic.

TIP: Take as much income as you can in 2010. There is no assurance that the lower tax rates that expire on January 1 will be renewed by Congress. If they are not, your taxes will go up next year. If your employer will pay your bonus in 2010, or allow you to receive your last paycheck in 2010, great!

The opposite of increasing your income is increasing your deductible expenses. As part of your tax planning for 2010, you may want to exercise this option.

TIP: Pay your January 2011 mortgage in 2010. You can deduct that extra mortgage interest. There has been a lot of talk about discontinuing the deduction for mortgage interest so it may be a very wise choice to take that extra month now rather than depend on the uncertainties of tax policy in 2011.

This is also the time of year to consider a donation to the charity of your choice. With the lousy economy, many worthwhile causes are hurting for funds and many have seen the demands for their services skyrocket. It is a deduction for your 2010 taxes, but it is also a good thing to do.

These are some simple ways that you can avoid a tax surprise in 2011 and minimize your tax obligation in 2010. Avoiding taxes is legal. It's evading taxes that carries the jail time.

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