6 Ways to Cut Your Tax in 2010
Hold onto your wallet. Prospects are strong that Washington will shrink the budget deficit and pay for health care reform by raising your taxes somehow over the next few years. “There’s probably no doubt that income taxes will go up on high income earners in 2011,” says Gerald Prante, an economist with the Tax Foundation. “Given the deficits, the unlikelihood that Congress will significantly cut spending, and that we might see a healthcare bill that increases spending, low- and middle-income people could see additional taxes too.”
On top of that, the planned estate-tax repeal for 2010 isn’t likely to happen. And the Bush tax cuts are due to expire at the end of 2010. If Congress doesn’t change the law, the top income tax rate will rise from 36 to 39.6 percent and the top 15 percent long-term capital gains rate will hit 20 percent. After 2010, dividends will be taxed as — gulp — ordinary income.
Although middle-class taxpayers may get a reprieve from these planned tax hikes, it’s “highly likely” that the top income tax rates (paid by couples making more than $250,000, and singles with incomes over $200,000) will be restored to Clinton-era levels, says Clint Stretch, managing principal of tax policy for Deloitte Tax.
So you’ll want to work especially hard in 2010 finding ways to keep your future taxes down. Two tax goodies may help: Starting in January, anyone can convert a traditional IRA to a Roth IRA, whose eventual withdrawals will be tax-free. And some homeowners who trade up (or down) may get a $6,500 federal tax credit.
Tax experts suggest these six strategies to run for shelter in 2010:
1. Consider converting your IRA to a Roth IRA
In the past, you could contribute to a Roth IRA only if your income was under $100,000. But starting in 2010, that bar is gone. So if you have a traditional IRA, whose withdrawals will be taxed, you may want to roll it into a Roth IRA and escape future taxes. This could be especially smart if you plan to transfer money to heirs someday, since they’ll get the Roth proceeds tax-free. But as MoneyWatch blogger Charlie Farrell has written, the conversion isn’t right for everyone. For starters, when you convert, you’ll need to have enough in savings to pay the taxes on the principal plus what your IRA has earned. “If you don’t have the money to pay those taxes, there’s no value in a conversion,” says Scott Leonard, a financial planner in Redondo Beach, Calif. You’ll be able to pay those taxes over two tax years — 2010 and 2011, however. The younger you are, the bigger the benefit of converting, since your retirement account will have more time to grow tax-free.
2. Fund your tax-deferred retirement accounts to the max
Exactly how taxes might go up in 2010 and who’ll owe them may be a mystery, but one thing is certain: taxes aren’t going down. So you’ll want to stuff as much as possible into your 401(k), IRA, or Keogh next year. In 2010, the maximum contribution amounts will be $16,500 for 401(k)s and $5,000 for IRAs. Eligible self-employed people will be allowed to invest up to $49,000 in Keogh. If you’re your own boss, spend a little time comparing the alternative tax-sheltered savings plans.
3. Heap cash into HSAs and FSAs
If your employer offers a pre-tax health savings account — and you’re signed up for it — you’ll be able to contribute up to $3,050 for yourself in 2010, $6,150 for your family. Flexible spending accounts (both medical and dependent versions) will be capped at $5,000. It’s too late to designate FSA money for 2010, but make your open enrollment selections accordingly for 2011.
4. Consider selling appreciated stocks and funds
Odds are good that the long-term capital gains tax rate will rise in 2011, as planned, for anyone above the 15 percent tax bracket. So if you’re single with an income over $34,000 or you and your spouse make more than $68,000, you can pretty much count on a capital gains tax rate boost after this year. While you should never sell an investment wholly for tax purposes, if you own winning stocks or equity funds and were planning to sell them, do it before the end of 2010 and avoid owing higher taxes on their gains. You might also push back your annual portfolio rebalancing from January 2011 to December 2010 to take advantage of the current tax rate on gains. You do rebalance every year, right?
5. Act fast to grab the home-buyer tax credit
Although the $6,500 tax credit for home purchases ($8,000 for first-time buyers) is on the books through June 30, binding contracts must be signed by April 30. So if you want to get the credit, make an offer pretty soon. Familiarize yourself with the details of the tax break to be sure you’ll qualify for it.
6. Keep an eye on Washington
Unless Congress acts, the estate tax will disappear in 2010 and then come roaring back in 2011 with a 55 percent top rate and a meager exclusion of $1 million. But experts believe there’s very little chance Washington will let the estate tax vanish, even for a year. The House just passed a bill permanently extending 2009’s 45 percent inheritance tax on estates over $3.5 million and the Senate is working on something similar. “It looks like there’s definitely going to be estate tax next year,” says William Massey, senior tax analyst at tax and accounting firm Thomson Reuters. “The exact shape is unknown, but probably a $3.5 million exemption per person and a continuation of the 45 percent top rate.” What happens after 2010 is anybody’s guess, though. Some pundits think the 2009 tax rules will be made permanent; others think the exclusion might get hitched to inflation or increased to $4 million or more.
Wait until the rules get set before making any estate-planning moves. But if Congress reinstates the $3.5 million exclusion, as expected, and you and your spouse have an estate worth more than that amount, you’ll then want to meet with an estate attorney. Ask about creating a tax-planned will with a bypass trust. With those documents, “when the first spouse dies, his assets go into a trust for the surviving spouse’s benefit,” says Houston financial planner Tom Posey. The surviving spouse can use the trust, but it doesn’t count as her property, so upon her death both her estate and the trust qualify for estate tax exclusions — and she can pass on the estate tax-free if the estate and trust are under the cap.
If you want to start shrinking your estate in 2010, both you and your spouse can give your children up to $13,000 each tax-free. Make sure they thank you.
Good Luck and be smart about money.
Creating Wealth without Risk 
What to Do in 2010: 6 Ways to Cut Your Taxes
by Kate Ashford in moneywatch.com
Categories: How to make money Tags: 6 ways cut your taxes, creating wealth without risk, cut your taxes in 2010
9 Ways to Reduce Debt in 2010
When it comes to your debt in 2010, you’ll want to combine a strong offense (grab a mortgage or refinance) with a powerhouse defense (beat back rising credit card rates and fees).
Mortgage rates are at historic lows — 5.07 percent for a 30-year fixed — and home buyers will be able to snag a special tax credit until July. So early 2010 will be a prime time to refinance your mortgage or apply for a new home loan. But credit card issuers will continue turning the screws on customers in 2010, raising rates and hiking or inventing fees. Because the credit card law taking effect in February will restrict lenders from punishing riskier customers, many good-citizen cardholders will be told to pay more.
The nine best strategies for borrowing in 2010:
1. Refinance your mortgage
Low mortgage rates will make refinancing tempting as the year begins, especially if you have an adjustable-rate mortgage resetting in 2010 or 2011. Many mortgage analysts think rates are as low as they’ll ever be. So the longer you wait, the more you risk the low-interest window shutting. Just remember the advice of MoneyWatch Editor-at-Large Jill Schlesinger: Don’t refinance if you don’t expect to stay in the home long enough to recoup the closing costs. Skittish lenders will be quick to reject applicants who seem too risky, so be sure you have what it takes to get approved for a refinancing. For example, your mortgage costs shouldn’t total more than 29 percent of your income.
If you’re upside-down in your mortgage and unable to refinance to a lower rate, but you’re current on your payments, you may be eligible for the federal government’s underutilized Home Affordable Refinance Program, which expires June 10. If you got your home’s first mortgage before January 2009 and it’s owned or guaranteed by Fannie Mae or Freddie Mac and doesn’t exceed 125 percent of your home’s current value, you’re eligible. “The refinancing program is the Rodney Dangerfield of government programs,” says Greg McBride, senior financial analyst for Bankrate.com. “It doesn’t get any attention.” If you’re behind on your mortgage payments or experiencing financial hardship, investigate the government’s Home Affordable Modification Program. Although both programs suffered from a slow ramp-up in 2009, look for efficiency improvements in 2010.
2. Buy a house
If you’ve been sitting on the sidelines waiting for the right moment to make an offer, 2010 will be the time. Says Mark Vitner, a senior economist for Wells Fargo: “We’re not going to see dramatic increases in interest rates, but they’re likely to gradually move higher over the year.” If you’ll qualify for the $6,500 home-buyer tax credit for current owners or the $8,000 credit for first-time buyers, make an offer before winter ends. You need to be under contract by April 30 to get the tax break.
3. Keep an eye on your credit score
A good credit score is more important than ever for anyone trying to get approved for loans or credit cards in 2010 and qualify for the lowest rates. Lenders consider a credit score above 720 to be good. To learn your score, order your free credit report from annualcreditreport.com and spring for the $8 additional charge for the magic number. Or take the results from the credit report and feed the info into the Score Estimator at MyFICO.com.
4. Check for any closed credit card accounts
When you read your credit report, make sure all your credit card accounts all still open. You may have cards buried in a drawer that were canceled without your knowing it, and a credit-card cancelation could have reduced your credit score. Even after the new credit card law takes effect in February, issuers will still be allowed to cancel your account without notifying you. Believe it or not, “that’s not considered a material change in the terms of your account,” says John Ulzheimer, president of consumer education for Credit.com.
5. Consider a credit union
Interest rates on cards from credit unions are about 20 percent lower than at banks, according to an October 2009 study by Pew Charitable Trusts. One reason: Unlike banks, which can slap on sky-high rates, federally chartered credit unions can’t charge more than 18 percent. (State-chartered credit union rates are also capped at about that rate, but state laws vary.) You’ll have to become a credit union member to get a card; find one at FindACreditUnion.com.
6. Charge every card you have (sensibly)
In 2010, credit card companies will be looking for any excuse to lower your credit limit, raise your interest rate, or nix you as a customer. Banks are still dealing with a serious increase in uncollectible balances. Bank of America, for instance, wrote off 76 percent more in uncollectible loans in 2009 than the previous year. If you’re not charging on a card and not carrying a balance, you’re not making the company any cash. That means you’re creating a bulls-eye on your credit line. So charge at least a little on every card most months.
7. Fight higher rates and fees
No matter how good a customer you are, don’t be surprised if you get hit with higher rates or new fees in the coming year. If that happens, call the card issuer and politely, but firmly, ask the rep to reverse the move. If you’re a longstanding customer on good terms with the company, there’s a decent chance you’ll get satisfaction, especially if you threaten to walk. Ken Lim, CEO of CreditKarma.com, a credit-score service, says card issuers these days often toughen up “on a batch basis” without paying much attention to the particular cardholder’s history. “Or sometimes they’re simply relying on you not even noticing the change,” says Lim. “You’d be surprised what a phone call can do.”
8. Opt out of overdraft charges
Beginning in February, you’ll have to tell your credit card issuer if you want to be allowed the ability to go over your limit (and owe an overdraft fee of up to $39) when making a purchase. Starting in July, you’ll have to do the same thing with your debit card — that is, you must “opt in” if you want overdraft protection on your debit card purchases and ATM withdrawals. If you do nothing, you’ll automatically opt out of both.
Banks will lobby hard to get you to opt in and add this “protection,” so they can rack up overdraft fees. Don’t fall for the bait. “I can’t think of a reason why you’d want to opt in,” says McBride. True, you might get embarrassed if your card is declined in public. But to us, that seems better than having to cough up $39.
9. Add your college-age child to your card account
Starting in February, a child under 21 won’t be able to get a credit card without a parent or legal guardian as co-signer unless he has proof of enough income to afford the monthly payments. This will protect some kids from predatory credit card practices and getting hooked on credit before they’re old enough to drink. And that’s a good thing. But it also means that some college students will have a harder time developing their own credit history.
That’s where you come in. If you have a responsible teen and want to help her build credit, add her as an authorized user to a card of yours. But don’t cosign for plastic with your child. “There are too many downsides to cosigning,” says Ulzheimer. “Cosigning means equal liability for both parties.”
What to Do in 2010: Banking, Loans, and Credit Cards
by Kate Ashford in moneywatch.com
Categories: How to make money Tags: 9 ways to make money, 9 ways to riches, cut your taxes in 2010, how to be debt free in 2010, how to reduce debt in 2010, make money in 2010, reduce debt in 2010, way to reduce debt, what to do in 2010
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