Although 2011 is way back in the rearview mirror, it’s still not
too late to make some moves that will save taxes on last year’s Form 1040 and
maybe on last year’s state income tax return as well. Here are three possibilities.

Choose to Deduct Sales Taxes If You Made Major 2011 Purchases

If you live in a state with low or no personal income taxes, be aware that
Congress extended the federal tax deduction for general state and local sales
taxes through 2011. Therefore, you have the option of deducting either state
and local sales taxes or state and local income taxes on your 2011 return–but
not both. If you chose to deduct sales taxes, most of you will have to use
IRS-provided tables to calculate your sales tax deduction. However, if you’ve
hoarded receipts from your 2011 purchases, you can add up your actual sales tax
amounts and deduct the total if that gives you a better answer. Even if you’re
forced to use the IRS table, you can still deduct actual sales taxes from major
2011 purchases for things like motor vehicles (including motorcycles, off-road
vehicles, and RVs), boats, aircraft, and certain home improvements on top of
the predetermined amount from the table. For details, see the instructions for
Schedule A of Form 1040 at the IRS website: www.irs.gov.

Establish SEP for Big 2011 Tax Break

If you’re self-employed and have not yet set up a tax-favored retirement plan
for yourself, you can establish a simplified employee pension (SEP). Unlike
other types of small business retirement plans, a SEP can be created this year
and still generate a large deduction on last year’s return. In fact, if you extend
your 2011 return to October 15, you’ll have until that late date to take care
of the paperwork and make a deductible contribution for last year. The
deductible pay-in can be up to 20% of your 2011 self-employment income or up to
25% of your salary if you worked for your own corporation. The absolute maximum
amount you can contribute for the 2011 tax year is $49,000. To establish a SEP,
go to your bank or brokerage firm and fill out Form 5305-SEP. It takes five
minutes. But don’t jump the gun. You may not want a SEP if you have employees,
because you would probably have to cover them and make contributions to their
accounts. That might be too expensive. Bottom line: if you have employees,
don’t start up a SEP without consulting your tax pro.

Tax Savings Example: If you’re in the 28% federal bracket, a $30,000 SEP
contribution could lower your 2011 tax bill by a cool $8,400 (plus any state
income tax savings). In fact, the tax savings could finance a big chunk of your
contribution.

Make Deductible IRA Contribution for 2011

If you’ve not made a deductible traditional IRA contribution for the 2011 tax
year, you can do so between now and the tax filing deadline of Tuesday April 17
and claim the resulting write-off on your 2011 return. You can potentially make
a deductible contribution of up to $5,000 — or $6,000 if you were age 50 or
older as of 12/31/11. So can your spouse. You must have enough earned income
last year (from jobs, self-employment, or alimony received) to equal or exceed
the amount you contribute to IRAs for the 2011 tax year. The only catch:
deductible IRA contributions are phased out (reduced or eliminated) if last
year’s income was too high. Please see the end of this article for details on
the deduction phase-out rules. The good news: the phase-out ranges are much
higher than just a few years ago.

Tax Savings Example: If you’re in the 25% federal bracket, a $5,000 deductible
IRA contribution between now and April 17 would save you $1,250 in 2011 taxes
(plus any state income tax savings). If you and your spouse are both over 50,
two $6,000 contributions (total of $12,000) would save $3,000 (plus any state
income tax savings).

Ground Rules for Deductible IRAs

* You, and/or your spouse if you’re married, must have 2011 earned income at
least equal to what you contribute for 2011.
* If you turned 70 1/2 last year, you can’t make any deductible contribution.
* If you’re unmarried and were covered by a retirement plan in 2011, your
eligibility to make a deductible contribution for last year is phased out
between adjusted gross income (AGI) of $56,000 and $66,000.
* If you’re married and both you and your spouse were covered by retirement
plans in 2011, your eligibility to make a deductible contribution for last year
is phased out between joint AGI of $90,000 and $110,000. Ditto for your spouse.
* If you’re married and only one spouse was covered by a retirement plan in
2011, the covered spouse’s eligibility to make a deductible contribution for
last year is phased out between joint AGI of $90,000 and $110,000. The
non-covered spouse’s eligibility is phased out between AGI of $169,000 and
$179,000.

By Bill Bischoff | SmartMoney