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Seven Tax Ideas To Use Throughout The Year

Even people who pay estimated taxes get the summer off, with no payments due between June and September. But that doesn’t mean you should take a vacation from tax planning. By staying focused on this essential part of your financial life, you may be able to reduce your federal income tax liability for 2011. These seven timely tax moves could help.

1. Balance securities sales.Though it seldom makes sense to buy or sell stocks or other investments just to save on taxes, your transactions do have tax consequences. If it’s time to lock in a profit or limit your losses on a disappointing investment, you may be able to make a later sale that offsets that loss or gain, and if you end the year with excess losses you can use them to offset up to $3,000 of ordinary income (and carry forward losses that exceed that amount). Even if you end up with long-term gains (for securities you’ve owned for more than 12 months), they’ll be taxed this year at just 15%—a rate that could rise after 2012. Just be careful not to fall victim to the “wash sale rule,” which disallows losses if you reacquire substantially identical securities within 30 days.

2. Support favorite causes.Though you may make most of your charitable gifts in December, there’s no reason to wait until then. Just be sure to document what you give so that you can report it when you file your taxes. Meanwhile, non-profits appreciate receiving support throughout the year. If you donate securities, you can generally deduct their fair market value if you’ve owned an investment for at least a year. You’ll also avoid capital gains taxes that would have been due on a sale.

3. Duck the AMT.The alternative minimum tax (AMT) continues to extend its reach. Your potential liability under this tax is based on a complex calculation that considers all aspects of your tax situation, including investment income and itemized deductions. Asking your tax advisor to give you a mid-year checkup might point you toward adjustments you could make to avoid the extra burden of the AMT, which can add thousands of dollars to your tax bill.

4. Generate energy tax credits.To encourage conservation, the government lets you claim a tax credit equal to 30% of the cost of installing energy-saving improvements ranging from central air-conditioning or a new furnace to insulation materials. Work you do this summer could qualify you for a maximum credit of $500 in 2011.

5. Salvage exemptions for college grads.If you provide more than half of the annual support of a relative, such as a child in school, you may be able to claim a dependency exemption for the relative. Each exemption for 2011 is $3,700 (up from $3,650). In most cases, this applies only to relatives with no more than $3,700 in taxable income, but children under age 19 and full-time students under age 24 are exempt from that rule. If your child graduated this spring, you can still qualify if you meet the half-support test for 2011.

6. Stay within “vacation home” boundaries.Tax laws limit deductions for the expenses of renting out a vacation home if your personal use exceeds the greater of 14 days or 10% of the days the home is rented out. Exceed that threshold and you will be able to deduct your costs only up to the amount of your rental income. By keeping an eye on this rule during the summer you may find ways to stay within the limits. For instance, you might decide to cut your own vacation short by a day or two or rent out the home for an extra week. Also keep in mind that the time you spend at the place doing repairs and maintenance doesn’t count as personal use for this purpose—even if the rest of your family tags along just for fun.

7. Educate yourself about education credits.If you have a child entering college this fall, you need to know about the American Opportunity Tax Credit (formerly known as the Hope Scholarship) for qualified higher education expenses. This tax break was enhanced by recent tax legislation. The maximum annual credit is now $2,500, up from $1,800, and it covers all four years of college (it had applied to only the first two years). These enhancements had originally been scheduled to expire after 2010, but they have been extended through 2012. The only downside here is that you may earn too much to qualify for this credit, which begins to phase out for couples filing jointly who have a modified adjusted gross income of $180,000 ($90,000 for single filers).

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