With April 15 just around the corner, it’s too late to make big changes, but not too early to get on track for 2010.
With “Tax Day” around the corner, many singles start clamoring to save money on their income tax return. Unfortunately, for most, waiting until April to figure out how to take advantage of tax laws requires too much effort without enough time to get your financial affairs in order. Tax planning can reap many benefits (regardless of your marital status) but that planning needs to start at the beginning, not at the end of the tax year. With that in mind, here’s a summary of some things to consider for 2009 and more importantly, an outline of how to be better prepared in 2010.
Make sure you have the correct filling status
If you were divorced at any time in 2009, the tax code considers you as single for the entire year, even if your divorce was finalized on December 31, 2009.
If you are single or separated and have physical custody of a child, you can claim “Head of Household.”
If you became a widow(er) in 2009, you can file as married.
If you became a widow(er) in 2007 or 2008 with a child and did not remarry in 2009, you can claim “Qualifying Widow(er) With Child” and use the married filling joint tax rates.
Contribute to a Retirement Plan
Singles need to plan for retirement, even more so than married people since we do not have a partner to contribute to our future welfare. Most plans needed to be set up in the previous year, but you have until April 15 to fund them, in some cases by the extended due date. The one exception is a plan for the self-employed (SEP). You have until the tax return due date, including extensions, to set up and fund the plan. As a single, you can defer taxes to retirement on $49,000 of income.
An important tax savings to consider in 2010 for the self-employed is the Solo (mini) 401(k) which needs to be set up by December 31, 2010. A single can defer taxes on $54,500 of current year income. This is similar to a traditional 401(k), but with relaxed rules to allow for no full time employees. The contribution limit is a combination of a salary deferral (same as a traditional 401(k) plus profit sharing (same as SEP or KEOGH).
Contribute to your Health Savings Account [HAS]
This needed to be set up last year, but you have until April 15 to fund the account. You must have a High-Deductible Health Plan [HDHP] to qualify for a HAS. It is important to note that this will be severely limited in the future as the result of recently passed Health Reform legislation. A single will not benefit from a HAS as they did in the past and might consider moving out of a HAS and HDHP to different health insurance.
Do not forget the following tax credits for singles:
Homebuyer – Credit is 10% of purchase price, max credit $8,000.
Homeowner’s Energy – Credit based of 30% of cost of qualified expenses.
Adoption Expense – Credit equal to amount of adoption expenses up to $12,150.
Hybrid Vehicle – Credit ranges from $250 to $3,400 depending on vehicle efficiency.
Electric Vehicle – Credit of $2,500 plus $417 for each KWH in excess of 4 KWH battery capacity.
College Tax Credits – There are three types of college tax credits a single person can take advantage of either for themselves or for their children. This credit ranges from $1,800 to $2,500.
Savers – For contributions to a Qualified Retirement plan for low income taxpayers [$39,750 for Head of Household / $26,500 for singles]
Child Care – $1,000 if a single filer earns less than $75,000
Earned Income – The IRS provides a schedule to determine your credit. Basically, the maximum credit if a single has no children is $457. For a single parent with one child the credit is $3,043 and $5,028 for two children. There is an additional amount for three or more children. The credit phases out to zero for an income of $13,400 to $43,279 depending on the number the children the single parent has.
Work Opportunity Tax Credit [WOTC] – A credit for employers only who employ unemployed veterans and disconnected youth.
Consider the following to avoid or mitigate the dreaded Alternative Minimum Tax [AMT]
Electing Capital Gains to be treated as investment income.
Moving interest and taxes from itemized deductions to an expense for self-employment income.
Use Section 179 in lieu of MACRS depreciation.
Elect to treat home mortgage as unsecured in lieu of a secured debt.
“Multiple Support Payments” if supporting a parent.
Release of claim to exemption for child of divorced parent.
Remember if you were unemployed during 2009, the first $2,400 of unemployment compensation is non-taxable.