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Summer is a good time to improve tax fitness with a few simple exercises.

Consider Roth IRA assets. By keeping assets inside a Roth IRA, they can grow tax free for retirement. Also, this year people can convert traditional IRAs to Roth IRAs. Account holders are no longer subject to the $100,000 modified adjusted gross income limit. With conversions that occur in 2010, they can also split their conversion amounts equally and report them as income for tax years 2011 and 2012.

Take advantage of tax-deferred retirement accounts. If you have a 401(k) or other employer-sponsored retirement plan available, contribute as much as you can afford to contribute. By increasing contributions every time you get a raise, you can increase your savings. The plans are basically funded with pretax dollars, which will reduce taxable income. Also, that money will grow tax free until it is withdrawn. If the contribution is to a Roth IRA, it is made with post-tax money, so the funds can be withdrawn tax free after the age of 59½.

Consider a 529 college savings plan. The annual $13,000 gift would go a long way toward the amount needed to save for education expenses. Contributors may also be eligible for a state tax deduction or credit. They can also take advantage of a special five-year accelerated gifting provision, which is $65,000 in one year per contributor. That covers the current year and the next four years.

Hold assets more than a year. Any capital gain made within a year is considered taxable income, like a salary. But gains taken after a year are considered capital gains, which in 2010 is taxed at the maximum rate of 15 percent. The capital gains rate is almost always lower than the income tax rate. Also, the capital gains rate is expected to go up to 20 percent next year, so some people are taking advantage by taking their gains this year.

Give to charity. Contributing to charities is always a good idea. But if you are planning a gift, it might be best to do it soon, because some in Washington have been looking at cutting back on charitable deductions as a revenue-saving measure.

The growth in national debt has been accompanied by an increase in discussion of new taxes. One of the latest ideas getting attention is the value-added tax, or VAT.

The VAT is basically a national sales tax and is common in most other countries. France, for example, derives half its revenue from the VAT.

Although it looks like a sales tax, there is a key difference. The VAT is applied throughout the production and sales cycle as value is added to the product. Original producers charge a tax to manufacturers, who charge retailers, who charge consumers. Each tax can be deducted from the next tax, which is supposed to reduce the impact on the consumer. It is important not only because it spreads the tax throughout the production and sales system, but also because it  helps keep the end sales tax below 10 percent, which is considered the limit of consumer acceptance. Above that, according to economic theory, more people figure out ways to evade the tax.

This is generally how the VAT works in European countries, where it adds 10 percent to 20 percent to purchases, although not all at once. The taxes also can be assessed differently, so, for example, food could be taxed at a lower rate than other goods.

Some like the VAT because it taxes consumption rather than income. Some argue that an income tax penalizes achievement because it taxes wage growth and investment. But others argue that consumption taxes penalize lower-wage earners because consumption eats up more of their income. So the tax would be a larger proportion of their spending. Income taxes are generally considered progressive, and consumption taxes are regressive.

People across the political spectrum are considering the tax, partly because it can be used to replace other taxes, such as corporate taxes, that are considered more onerous. Besides general opposition to consumption taxes and, of course, to taxes in total, a key argument against the VAT is that it does not address the problem of overspending. Many people say that rather than figuring out how to fund growing government, government should figure out how to stop growing. Others say this is unrealistic, given the inevitable increase in Medicare and Social Security alone, and that a more equitable way to pay for government spending should be devised.

The VAT tax is likely to get more attention over the coming months, because Congress and the Obama administration have been asking for studies on its impact as a basis for future policy.

Death and taxes are inevitable but so are mistakes. Here are some of the most common mistakes on tax returns, according to the IRS and other sources:

• Rebates and credits: Supposedly the No.1 mistake in returns filed last year was the incorrect handling of the 2008 recovery rebate. More than 2 million returns did not include or incorrectly figured the rebate, according to published reports. Some tax experts are advising this year to include the “Making Work Pay” tax credit that was part of the 2009 stimulus package. The credit is worth $400 for individuals and $800 for couples.
• Capital gains: Short-term capital gains apply to assets owned for less than a year. After that they become long-term gains, which are preferable because they are generally taxed at a lower rate than your regular income (which includes short-term capital gains). A loss can also lower your taxable income, but it gets tricky. First you must net the gains and losses. The short-term loss is subtracted from the short-term gain and then the long-term loss is subtracted from the long-term gain and the results are netted against each other. If you still end up with a loss, up to $3,000 of it can be subtracted from your taxable income.
• Filing status: Many choose the incorrect filing status (there are five), which can affect the deduction. For example, someone might have become a widow or widower since filing the last return, and check another status out of habit. It might sound like a simple clerical issue, but filing status determines which tax rates and which standard deduction amounts apply.
• Math: It might sound basic, but math mistakes are among the leading reasons the IRS has to adjust a return. And who really wants to catch the attention of the IRS? Be safe and compute twice.
• Deductions: Many errors occur when trying to figure out the taxable income. Commonly overlooked items are earned income tax credit, standard deduction for age 65 or over or being blind, the taxable amount of Social Security benefits, and the child and dependent care credit.

Dumb stuff: These are the details that trip up many people. Be sure of Social Security numbers for anyone listed on the tax return. Also be sure of a dependent’s last name. Sounds odd, but the IRS says lots of people make this mistake. And, don’t forget to sign the return!

Richmond, Virginia (Thomas P. Marshall) – As tax time approaches, many people really appreciate how complicated the tax code is and how there has got to be a simpler way to do it.

Those people would have plenty of company in that line of thinking. President Barack Obama has said the code needs to be streamlined and created a task force to recommend changes. He named as its chairman Paul Volcker, who, as the former head of the Federal Reserve, has been credited with taming another monster – the roaring inflation rate of the late ‘70s.

Although that group has not come up with recommendations, a couple of senators put forward a proposal in February that would significantly affect the code. Sens. Judd Gregg, R-N.H., and Ron Wyden, D-Ore., introduced the bill, which goes by the modest name of the Bipartisan Tax Fairness and Simplification Act of 2010. It would cut the number of income tax brackets in half and flatten the corporate tax rate.

There would be just three tax rates: 15 percent, 25 percent and 35 percent. The bill would also eliminate the alternative minimum tax, which threatens to ensnare middle-income taxpayers each year unless legislators pass a “patch.” Also, most taxpayers would be able to use a one-page form to submit their taxes, the senators said.

The law would almost triple the standard deduction and reduce taxes for those earning less than $200,000, Wyden said. It would still allow deductions for mortgage interest, charitable contributions and child tax credits.

The corporate income tax would have a single rate of 24 percent but allow small businesses with receipts of up to $1 million to expense equipment and inventory costs.

The capital gains tax also would be changed. The law would exempt the first 35 percent of capital gains income from the tax. The first $500,000 of investment would be considered long-term capital gains income after six months rather than a year.

The House of Representatives is expected to offer its own version of tax simplification.

Every year the government rolls out new tax breaks, but too many taxpayers fail to take advantage of them. As a result many Americans pay higher taxes than they should. Tax rules also change, and missing out on these amendments could cost taxpayers dearly. This is why it’s important to do your tax planning way ahead of time instead of waiting for the last possible moment.

Here are some of the tax tips for 2010 that you should consider:

• $16,500 tax-free 401(k) maximum contribution limits. The IRS is holding the maximum amount an employee can contribute to a 401(k) in 2010 at $16,500. Catch-up contribution will remain unchanged from 2009 at $5,500 for individuals over the age of 50. The contribution limits are set annually based on the inflation rate in the third quarter vs. the previous year’s quarter. This is good news since many were expecting the IRS to reduce the limit.

• The return of the RMD. The required minimum distribution (RMD) was eliminated last year for taxpayers who are at least 70½ years of age. In 2010 RMDs are back. If you fail to withdraw an RMD, fail to withdraw the full amount of the RMD or fail to withdraw the RMD by the applicable deadline, you will have to pay a 50 percent tax on the amount not withdrawn.

• Income limits for Roth IRA conversions eliminated. Starting this year the adjusted gross income limit of $100,000 and the filing status requirement have both been abolished. Anyone is now eligible to convert a traditional IRA or any other retirement plans from a previous employer to a Roth IRA. When you make a conversion, the conversion amount counts as ordinary income. For this year, however, you have the option to recognize 50 percent of the conversion amount as ordinary income in 2011 and the other half in 2012.

You can reduce the amount of your taxes or increase your tax refunds by claiming an additional personal exemption for each of your dependents. You may also save thousands of dollars by claiming the child tax credit, the child and dependent care tax credit, and the earned income tax credit.

However, the IRS rules for claiming a dependent – child or relative – aren’t as easy as picking a name off your family tree. Many possible scenarios make it hard to determine qualified dependents for your tax return. Here are the general tests to help you determine a qualified child dependent.

He or she can be a biological, step-, adopted or foster child; a full, half or stepsibling; or a grandchild, nephew or niece – but only if the person lives with you for at least six months and one day of the year.

Only one taxpayer can claim a child as a dependent. If the child is under shared custody, the household where he or she spends the most prescribed time gets the prize. If the child spends equal time between the two parents, the one with the bigger adjusted gross income (AGI) can claim the child as a dependent.

The child dependent must be under age 19 by Dec. 31 of the tax year. If the person is a full-time student for at least five months out of the year, he or she can be a dependent until the age of 24. There is no age limit for dependents who are totally and permanently disabled.

Generally, you cannot claim a married person who lived with you for a year as a dependent, unless the married person does not file a joint tax return.

If the child dependent is employed, he or she must have a gross income of less than $3,400 or be unable to provide more than half of his or her own support for the tax year. For instance, 17-year old Miley Cyrus would not qualify as Billy Ray’s dependent since she made something like $25 million last year.

The other category, qualifying relative, applies to individuals related to you in ways specified in the qualifying child dependent section. It also includes parents and stepparents, aunts, uncles, grandparents and other direct ancestors. You can also add your in-laws: father, mother, brother and sister. The relative must have lived with you the whole year and meet some of the requirements that apply to the child dependent.

Americans lead the world in charitable giving – twice as much as the next most charitable country, according to a 2006 Charities Aid Foundation report. In 2006, Americans set a new record in philanthropic contributions, with an estimated $295 billion. A large percentage of that comes from individual donors.

Experts say the practice of voluntary giving has positive effects on the giver’s health, happiness and even personal wealth.

A direct effect on wealth is, of course, the tax deduction. But only certain donations qualify.

The tax benefits are applicable only to contributions made to qualified organizations and are not set aside for use by a specific person. Legitimate public charities are mostly federally approved 501(c)(3) organizations. Generally, they include religious, educational, scientific, literary and charitable organizations. Certain organizations that foster national or international amateur sports competition may also qualify. The IRS has on its Web site a list of organizations eligible to receive tax-deductible charitable contributions.

Generally, deductions for monetary contributions are limited to 50 percent of adjusted gross income (AGI). For example, the deduction limit for an AGI of $100,000 is $50,000 for that year. In some cases, 20 percent and 30 percent limits may apply to gifts of property that have appreciated in value and are held for more than one year. Any amount in excess of the applicable limitation to charity in one year can be carried over for the next five years.

Charitable donations made by credit card are deductible in the year they are charged to the credit card, even if the giver pays the credit card company in a later year. Donations made through a pay-by-phone bank account are not deductible until the payment date is shown on the bank statement.

Different tax rules apply for cash contributions where the donor receives a financial or economic benefit in return, such as purchasing a ticket for a dinner dance at a church or for a fundraising auction conducted by a charity.

There are many ways to contribute to a qualified cause. These may include charitable gift annuities, gifts in kind, volunteer work and endowments. While some of these ways may not provide direct tax benefits, the IRS may allow indirect write-offs. Consult with a tax advisor about the many ways Uncle Sam repays good deeds.

To comply with IRS requirements, please be advised that, unless otherwise stated by the sender, any tax advice contained on this web-site or in e-mails or attachments sent from this website or from VERPA Tax is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement.