Your Taxes: Tax Time FAQs
Although I am always quick to add that I am not a financial planner, I field quite a few financial planning questions this time of year. While I strongly believe that each of us should have four professionals on their speed dial – a CPA, a financial planner, an attorney and an insurance agent – I will overstep my bounds for a moment and address some of the most frequently asked questions regarding financial planning at tax time.Let’s talk about traditional IRAs first. For 2010 and 2011, the IRA contributions limit remains at $5,000 (or $6,000 for taxpayers age 50 and over). This means you can invest $5,000 (or $6,000) into either a traditional or Roth IRA as long as you meet certain income requirements. To fully invest in a traditional IRA, your income must be less than $66,000, if filing Single or Head of Household, or $109,000 if Married Filing Jointly or a Qualified Widow ($177,000 if you are Married Filing Jointly and the spouse of an employee covered by an employer plan). Confused yet? I never recommend taxpayers fund their IRAs in advance unless they are certain they meet the requirements. I always suggest you set the money aside and wait until tax time if you are nearing income limits to be sure you are eligible to make the contribution.Roth IRA contributions are a bit simpler. The contribution limits are the same as the traditional IRA, $5,000 (or $6,000 for taxpayers age 50 and over). The income phase-outs for the Roth IRA are a bit simpler. You can only maximize your Roth IRA contribution if your income is less than $177,000 (if MFJ) or $120,000 (if Single, Head of Household, Qualified Widow, or Married Filing Separately). These income limits are for 2010, and increase by $2,000 in 2011.Other retirement plans, namely the 401(k), 403(b), and 457 government plans, haven’t changed in a few years. These plan contribution limits remain at $16,500 for a third year, with participants who turn 50 before the end of a year being allowed an additional contribution of $5,500, for a total contribution limit of $22,000 in any year.Perhaps the question I hear most often is “How can I keep my taxes low?” My answer has always been the same: Are you maxing out your retirement plans? Here’s how I see it. If you pay $1,000 of a deductible expense, you save that deduction times your tax rate. For a taxpayer with a 20 percent tax rate, spending $1,000 would save them $200 in taxes. Retirement plans are quite the opposite. Let’s say you defer $1,000 into a 401(k). You get the $1,000 as a deduction, so you still save $200 on taxes, but the added bonus is that your $1,000 is still in your name, You didn’t spend a dime!Now is a great time of year to rethink your tax savings through retirement contributions. Take a look at your W-2. Somewhere in Box 12, you’ll see your annual retirement contributions. If you are under 50 and you see $16,500 in Box 12, you’re all set! But, if your amount is less than the maximums listed above, you should consider increasing your withholdings if at all possible. The net effect of the check may be less than you think! Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
Support Local Journalism
Support Local Journalism
As a Summit Daily News reader, you make our work possible.
Now more than ever, your financial support is critical to help us keep our communities informed about the evolving coronavirus pandemic and the impact it is having on our residents and businesses. Every contribution, no matter the size, will make a difference.
Your donation will be used exclusively to support quality, local journalism.
Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.
User Legend: Moderator Trusted User