Before you send your tax information off to your tax preparer, you might want to give it one last look to make sure you have not missed any tax deductions that could cut your tax bill for 2011.

That’s right, it’s the 2011 tax season, and you should already be looking for those federal income tax deductions that can legally lower your tax bill.

Here are a number of the typical deductions that you want to make sure your tax preparer knows about so you get the full federal income tax deduction allowed.

Traditional IRA contributions

You have until April 17, 2012, to contribute up to $5,000 to a traditional IRA for 2011 and deduct it on your tax return. You need to know the guidelines, so here they are in brief:

If you weren’t covered by an employer’s retirement plan in 2011, you can generally deduct your contribution in full.

If you were covered by an employer plan, you can only take a deduction if your adjusted gross income was below $66,000 ($109,000 for married couples).

If your spouse was covered but you weren’t, you can take a deduction if your combined adjusted gross income was below $179,000.

If you were age 50 or older on the last day of 2011, you can contribute up to $6,000. (more…)

You can apply for income tax relief for up to $2 million (or $1 million if married and filing separately) in debt that is cancelled, or forgiven, by your mortgage lender on your primary residence. The law has been extended through 2012 under the Emergency Economic Stabilization Act.

If you have lost your home through foreclosure or have restructured your mortgage loan, you may qualify for this tax relief under the extended tax law called the Mortgage Forgiveness Debt Relief Act of 2007. The claim can be made by using IRS Form 982.

There are two qualifying factors that must be met on the mortgage debt exclusion: 1) it must be your primary home, and 2) the debt must have been used to buy, build, or make substantial improvements to the residence to which the mortgage applies. Certain business or farm property may also qualify for tax-free treatment, so check with your accountant or tax attorney in this situation.

When a lender forgives debt, it is typically a taxable event. You would receive a 1099-C (Cancellation of Debt) and the income would be claimed on Line 21 on your personal 1040 income tax Form. (IRS Publication 525)

While mortgages for second homes and rental properties do not qualify for the exclusion, some or all of this debt might qualify for other exclusions if you are insolvent at the time the debt was settled.

Canceled credit debt does not have to be included in income if it was a gift, or if the individual is insolvent, or in a bankruptcy case. The exclusion for insolvency is particularly important in this case, because it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties, and will be helpful in this situation. This is an important point for borrowers whose property has dropped in value below what is owed on the mortgage.

According to the IRS, “A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV (fair market value) of the assets. Determine the debtor’s liabilities and the FMV (fair market value) of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.”  (IRS Publication 908)

The value of all of your assets and all of the liabilities you owe have to be calculated to figure out if you are insolvent, and by what amount, so as always, check with your professional accountant to see how you can best take advantage of these tax relief measures for exclusions of cancelled or settled credit  and mortgage debts.

REMINDER:

Corporate tax returns are due March 15th and extension deadline filing is September 15th

Personal tax returns are due April 15th and extension deadline filing is October 15th

The tax planning clock is clicking away toward the end of the year.  Is your business ready to take advantage of the tax saving measures available to you? Tax planning is essential for business owners, and should be done on a quarterly basis. However, it’s not too late if you do it before mid-December. Here are some words of wisdom from financial planner, P. Christopher Music.

Well, the year is coming to an end and many business owners are meeting with their accountants and tax advisors to figure out how to reduce that inevitable income tax burden coming in April.  Here are a few strategic ways to keep some more of that money at home.

Business owners are often successful in earning some money beyond the expenses of acquiring it—in short, profit.  The only problem is, the profit is taxed.  So, we work with our tax advisors to lower this burden by strategically spending money in various ways by the end of the year in an attempt to cut off the bleeding.

One of the most popular techniques is to “spend the money since it’s going to be taxed anyway”.  I always get a charge out of this technique since it does not evaluate on what the money is spent.  One of the laws of economics is that money derived from production must be reinvested into production to expand the organization.  In other words, the expense must buy something of value that can further grow in value.

This technique can be summed up in “accelerating expenses”.  Next year the company will have expenses like rent, promotion and marketing, utilities, etc.  Accelerating these expenses only defer the tax owed since you will have to do the same thing next year to avoid the tax.  This has some limited workability, especially if you have volatility in your annual income and can pay the taxes at lower rates in a year with lower income.

There are, however, other options.  One of these options is to use some form of retirement plan.  These can range from a traditional Individual Retirement Account (IRA) where a person can invest up to $5000 ($6000 over age 50), to something called a “Super 401k” that combines various types of retirement plans to allow someone to contribute upwards of $200,000 or more per year.  That’s right.  Now, the benefit of this kind of expense is that it can not only save income taxes in the current year, but it will create an additional asset of value that can be used in the future to create retirement income.

If you have a C corporation, there is a plan called a Section 79 plan (so named after the IRS Code section) that will allow a business owner to purchase cash value life insurance with potentially tax-deductible dollars.  Of course, you have to purchase life insurance on your employees (inexpensive term) and you will only be able to deduct a portion of the annual life premiums, but this may make sense if you qualify for such a plan.  This type of benefit plan would allow the business owner to accumulate assets inside a life insurance policy that can later be used to provide supplemental retirement income.

These are just a couple of options available to business owners besides just spending money “because it will be taxed anyway”.  Use the tools available to lower your taxes and build wealth for the future.

For more information, contact Christopher Music. Wealth Advisory Associates www.wealthadvisoryassociates.com a Registered Investment Advisor, is a comprehensive financial planning firm serving professionals and small business owners nationally. We focus on assisting our clients in achieving a truly affluent lifestyle by using the natural laws of personal economics.

Many taxpayers who owe taxes believe tax extensions protect them, but they are only partially right. Do you know the rules and deadlines for filing corporate and personal tax extensions? For companies it is March 15 and for personal tax returns it is April 15.

Here’s the ugly truth about tax extensions, but first if you need to file one, do it before midnight on the deadline by using Form 7004 for a company that you can get here: http://www.irs.gov/pub/irs-pdf/f7004.pdf or Form 4868 for personal extensions that you can get here: http://www.irs.gov/pub/irs-pdf/f4868.pdf

Penalty for not filing tax returns on time

The IRS is much worse than any credit card company, charging a 5% PER MONTH penalty up to 25% of what you owe for late filing that compounds DAILY. That’s a whopping 60% per year, even if you did file an extension!

Interest charges for late filing of tax returns

As of midnight on tax deadline day, the interest on any taxes you owe, but do not pay, with your return accrues at the rate of 3% PER MONTH up to 25% of what you owe for late filing that compounds DAILY. That’s a whopping 36% per year!

The total? A unbearable 8% per month (96% per year) compounding daily. Another “Pay For Life” program.

If you can’t pay what you owe, ask for a payment plan by filing Form 9465 Installment Agreement Request that you can get here: http://www.irs.gov/pub/irs-pdf/f9465.pdf

Note: the caution on the form that states: Do not file this form if you are currently making payments on an installment agreement or can pay your balance due in full within 120 days. Instead, call 1-800-829-1040. And yes, unfortunately, interest and penalties continue until it is paid in full.

The remedy is paying quarterly estimated tax payments if you owe taxes each year. At least what you pay in these payments cannot accrue penalties and interest.

The best money management remedy would be to join the grass roots movement to get Congress to get the FairTax Act passed. To find out more about what you can do to get involved and make that happen, visit www.fairtax.org today.

If you are in debt, claim your free copy of the Debt Reduction Solutions Guide here: http://www.thedebtreductionsolution.com/

If you have anything to say about taxes, leave a comment.

Sandra Simmons, President of Money Management Solutions (www.moneymgmtsolutions.com) specializes in helping business owners and individuals manage their money and do tax planning to achieve their financial goals.