With 2010 ending, it's a good time to think about taxes.
"It's a tax year like years before, and there are basic moves and things you can do to reduce your taxes," said Mark Steber, chief tax officer for Jackson Hewitt Tax Service, a tax-preparation firm.
Don't overlook tax breaks that apply to lifestyle changes such as adding a child, taking care of a dependant parent or going back to school.
"Lifestyle changes now are not just getting married or having a child. It really is more complex, like taking care of a dependant parent," Steber said.
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Housing: Taxpayers who went through a foreclosure, short sale or loan modification on a primary residence do not have to pay federal income taxes on forgiven debt resulting from the transaction. For more details and limitations, check out IRS.gov.
On the other side of the housing coin, there is a federal tax credit for qualified 2010 primary home purchases for transactions that closed by Sept. 30. (A June 30 closing deadline was extended by three months for homes under contract.) Again, check IRS.gov for more details.
Retirees: One big change for tax year 2010 applies to retired taxpayers age 701/2 or older who have traditional individual retirement accounts, 401(k)s and other tax-deferred retirement plans. The requirement to take minimum distributions was temporarily suspended by Congress in 2009 to shield retirees from having to withdraw money from accounts that had lost value from the late 2008 market sell-off.
Now that suspension is over. So account holders who did not take a required minimum distribution last year must take their 2010 distribution before Dec. 31. Those who do not are subject to tax penalties. (The requirement does not apply to tax-free Roth IRAs).
"They can take more than the minimum, but they have to take at least the minimum. It applies to anyone who is in a retirement account who is over 701/2," said Rich Arzaga, certified financial planner at San Ramon, Calif.-based Cornerstone Wealth Management.
Taxpayers who turned 701/2 between July 1, 2008, and July 1, 2010, and who did not take their first-time minimum distribution last year have until April 1 to do so. But they would also have to take their 2011 distribution by Dec. 31, 2011.
IRAs: Taxpayers have until Dec. 31 to take advantage of an opportunity to convert a traditional tax-deferred IRA into a tax-free Roth IRA while having the option to spread out the income tax dues on the conversion into tax years 2011 and 2012. (While the ability to spread out the tax over two years goes away in 2011, income restrictions have been permanently lifted for converting traditional IRAs into Roth IRAs.)
Evergreen tax strategies: They include making January's mortgage payment in December to obtain a larger itemized deduction for mortgage interest on a 2010 return. Selling losing stocks, bonds and mutual funds that are not part of a retirement account by Dec. 31 can also help reduce taxes. The strategy can be used whether you itemize or take a standard deduction.
"You can deduct up to $3,000 of capital losses against your ordinary income. That never hurts," said Robin Christian, senior tax analyst at Thomson Reuters Tax & Accounting. Losses above $3,000 can be used to offset future capital gains.
Charities: Making a charitable donation is another evergreen strategy, but it can be used only if you itemize. For tax year 2010, the standard deduction is $11,400 for married couples filing jointly, $8,400 for head-of-household filers, and $5,700 for single filers.
"[The standard deduction for married couples] is a pretty big amount. So an evergreen thing to do is to bunch your deductions so you can take all of your charitable contributions this year," Christian said.