Heidi Foster: Take advantage of tax incentives

Each year at this time, we, as citizens of the U.S. ponder the taxes we pay.

"Our tax system is such that for 2010 an estimated 45 percent of American households will pay no income tax with the average taxpayer paying 18 percent," reports Roberton Williams, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

How do these households manage to pay no income tax?

"They take advantage of tax credits such as the earned income credit, the child and child-care credits, the Lifetime Learning credit, for college expenses, and the saver's credit, which subsidizes retirement saving," said Williams, adding that "0.3 percent of those with annual incomes above $1 million will manage to avoid federal income tax through elaborate tax planning."

While our government needs taxes to operate, it structures certain tax incentives to drive desired behaviors. Being aware of some of these tax opportunities allows you to use them.

A good place to start is by taking advantage of tax deferral opportunities whenever possible, i.e. retirement programs or health care spending accounts. While working with a professional tax or financial adviser is the best way to assess your personal situation, below are some of the more common tax credits or incentives.

Child-care credit (not just for children)

You might be able to claim the credit if you pay someone to care for your dependent who is younger than 13 or for your spouse or another dependent who is not able to care for himself or herself. The credit can be up to 35 percent of your expenses. To qualify, you must pay these expenses so you can work or look for work.

Earned Income Credit

This credit allows low to moderate-income working individuals and families to receive a refundable federal income tax credit.

As with all tax credits, you must file a tax return to take advantage of this credit.

Paying for college

The Lifetime Learning Credit is based on qualified tuition and related expenses paid for yourself, your spouse or a dependent for which you claim an exemption on your tax return for qualified tuition and related expenses paid in the tax year for an academic period beginning in that year or in the first three months of the following year. An eligible student is enrolled in one or more courses at an eligible educational institution to acquire or improve job skills.

With higher unemployment, especially in Northern Nevada, this might be the perfect time to sharpen your skills and take advantage of this potential tax credit. Please note this credit phases out depending on your adjusted gross income, or AGI.

Retirement

The saver's credit helps offset a portion of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply.

If your company offers a retirement program, store as much away as possible. Not only does this save on taxes, many companies also will match a portion of the employees' allocation.

Whether your company provides a retirement program, you always can put money into an individual retirement account, or IRA, subject to limitations. The contribution might be tax deductible depending on your AGI, but the investment always can grow tax deferred.

This year, Tax Relief Act of 2010 has created a 2 percent employee payroll tax cut. If you do not ignore the extra money in each paycheck, this can create the perfect opportunity to take advantage of setting some money aside for retirement or take a class to improve your job skills. What are you going to do with this gift from the government?

Heidi Foster is a wealth adviser and investment manager with American Wealth Management (www.financialhealth.com) and can be reached at 775-332-7000 or Heidi@financialhealth.com.

Securities offered through LPL Financial member FINRA/SIPC. Investment advice offered through American Wealth Management, a registered investment adviser and a separate entity from LPL Financial.
These views are those of the author and should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.