Last Minute Tax Steps for 2010

credit: David Reber's Hammer Photography on Flickr

With 2011 just around the corner, you’re probably thinking about closing out the books on this year. You might be considering what you need to get your taxes done and generally start the year off right. But 2010 isn’t quite over and there are still a few things that you can do to improve your tax situation right now.

I talked to Travis Raml, a CPA working with clients in Maryland and Virginia, to get some tips on how to end 2010 right — at least in terms of taxes.

Put Some Money Away

If you’ve got a flush bank account right now and you don’t expect that you’d have a problem doing without that money, you can kill two birds with one stone. Raml points out that you can save quite a bit of money on your taxes by placing that money in a retirement account. “If a freelancer is committed to tax savings and does not have a problem parting with the money right now, then maximizing an IRA or establishing a SEP IRA retirement account is a great option to reduce your taxes and save for the future.”

That way, you’re putting away money for retirement (often a big problem for freelancers) and dropping the amount of money you’ll actually have to hand over to the IRS in April.

Pull Out Your Credit Card

If you need to make a big purchase for your freelance work, do it before the end of 2010, even if you have to use a credit card to do it. “Accelerating year end expense (especially those that they would normally incur in the first few months of the year) is a good way to reduce your taxes. Using credit cards is assumed the same as cash even if you don’t pay the credit card bill until next year,” says Raml. “This either defers the taxes to the following year or possibly eliminates the taxes entirely if your tax situation changes down the road.”

Start Planning for Your Taxes

The earlier you can get your own taxes in order, the better off you’ll be. “My universal tip to freelancers is calculate your income or loss prior to year end (perhaps through the middle of December). This gives your the ability to know how much you made or lost and plan accordingly. Sometimes clients ballpark the years activity in their mind, and then when it comes to putting it down on paper the reality is something different. Depending on your situation this can result in painful tax consequences and minimize your options,” says Raml.

It’s a good idea to talk to a tax professional before the end of the year, so that you don’t miss out on anything, as Raml points out: “It always wise to reach out to your tax preparer (especially if your preparer doesn’t through newsletters, blogs, or year end organizers) before year end especially if your situation has changed from the prior year. Once the year has ended it minimizes your ability to lower your taxes.”

Check Out Changes in Tax Law

Raml points out that if you have purchased health insurance for yourself, you may be in a better tax situation this year. “One of the most important changes is treatment of self employed health insurance. In previous years self employed health insurance was not a deduction for self employment tax purposes (roughly 15% which is in addition to regular income taxes). For 2010 the deduction is now allowed prior to the calculation. So if you spent $10,000 in unsubsidized health insurance premiums (which generally includes health, vision, and dental) this could result in almost $1500 in tax savings. Of course this won’t apply to all freelancers but if it does it can result in great tax savings.”

You may also see some benefits if you just started freelancing, as well. “For those new to freelance work the increase in deductible start up expenses from $5,000 to $10,000 is great news. Start up costs are expenses usually incurred prior to officially starting a business. Start up expenses not immediately deductible must be amortized over 15 years, so the ability to deduct a greater portion of these expenses is great news,” Raml continues.

Since we aren’t all tax experts, these changes make it especially important to talk to a professional as early as possible. That way, you won’t miss anything important.

Photo credit: David Reber’s Hammer Photography on Flickr