Ten Tasty Tax Tips for 2011
Last year was one of great uncertainty when it came to taxes. Although Congress had known for years that numerous tax laws were expiring at the end of 2010, representatives and senators kept putting off key action.
But who needs Congress?
Regardless of what does or doesn't happen on Capitol Hill, each year there are plenty of tax moves you can make to help reduce what you owe to the Internal Revenue Service. These 10 tax tips can do just that.
Adopt a child
OK, this is a major decision and not one to be made simply because of a tax break. But if you are planning to add to your family via adoption, then Uncle Sam offers a nice benefit this year.
As part of the health care reform act, the adoption tax credit was expanded. This credit helps adoptive parents pay some of the processing costs. For 2011, that amount is a maximum of $13,360 per eligible child. The increased credit applies to the adoption of any child, not just special needs children, and includes international and domestic adoptions.
Even better, the adoption credit is now refundable, meaning the claim could produce a refund if you owe no tax.
However, the adoption tax-break enhancements are only good though 2011 unless Congress extends them.
Watch out for FSA limits
Medical flexible spending accounts, or FSAs, are not as flexible in 2011. These workplace plans allow employees to put pretax money into accounts and then use the money to pay for medical expenses not covered by insurance.
But one category that is no longer eligible for reimbursement is over-the-counter medicines. Beginning Jan. 1, you must get a doctor's prescription to use FSA money to pay for over-the-counter medications. This means you'll need your doctor's official, written order that you take nonprescription cold tablets.
The new over-the-counter regulations are based on the "tax" year, which runs from Jan. 1 through Dec. 31, not a workplace's benefit plan's year. So if your plan year runs from May 1, 2010, through April 30, 2011, any over-the-counter expenses you incur from the beginning of 2011 are not allowed unless you have a prescription, even though your plan year runs for four more months.
Convert to a Roth IRA
Roth IRAs are popular because when the money is withdrawn in retirement, there's no tax due. These accounts are enjoying a new surge of popularity now that there's no longer an income limit on who can convert a traditional IRA to a Roth account.
This conversion option became available last year and also included the ability to spread any taxes due upon conversion over two subsequent tax years. The tax-deferral opportunity is gone. If you convert a traditional IRA to a Roth IRA in 2011, you'll have to pay all conversion taxes this tax year. But for some, it still might be worthwhile to convert to a Roth.