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Year End Tax Saving Tips

Year End Tax Saving Tips
December 4, 2010 Admin
In Uncategorized

Year End Tax Saving Tips

There is a great deal of uncertainty around tax rates for 2011, and we may not hear about definite changes until later in December. Still, there are some moves you can make right now to potentially reduce your financial exposure to Uncle Sam come April 15.

  1. Deduct Business Expenses
    If you started your own business or began freelancing or working from home, gather up those business-related receipts. The cost of work-related travel, food, office supplies – maybe even gas – can be deducted from your taxable income. Check out the IRS’ list of qualifying deductions.
  2. Review Medical Expenses
    Know that you can deduct your out-of-pocket medical expenses as long as they add up to 7.5% or more of your adjusted gross income. (So if you earn $75,000, for instance, that’s $5,625.) If you’re thinking of getting any elective surgery – even LASIK – that expense, plus other out-of-pocket medical care you paid this year for, could help reduce your taxable income.
  3. Donate
    Charitable donations – from cash to cars – may be tax deductible up to 50% of your adjustable gross income. Appreciated property donations – like real estate, art, antiques – are deductible up to 30%. Time to start cleaning out the closet.
  4. Offset Capital Gains
    It’s been an up year for the market overall, so if you’ve cashed in on some gains, look for losing stocks in your portfolio. If you sell them before the end of the year to end up, the net loss can offset your short-term capital gains (which are taxed at 35%).
  5. Boost Retirement Savings
    If you’ve neglected to save this year, it’s not too late to get aggressive and further reduce your taxable income. The maximum contribution this year to a 401(k) is $16,500 (or $22,000 if you’re over 50). For IRAs, the max contribution is $5,000, or $6,000 if you’re above the age of 50. Expecting a year-end bonus? Not a bad way to pay yourself.
  6. Review your income, expenses and potential deductions: Before you can make any adjustments, you will need to look closely at how much you are earning, spending, and saving and what you can deduct.
  7. Defer income: Unless you have reason to believe that next year will bring you a higher income and move you into a higher personal income tax bracket, you may want to defer income until after the first of the year. If you are self-employed, for example, send the last invoices out late in December so you will more likely receive payment in January.
  8. Use up your flex spending plan: If you have a flexible spending plan, which means you have put aside tax-free earnings to cover medical and dental expenses through a plan offered by your employer, you need to use it up. Make doctor appointments now and buy necessary medical supplies that are covered in the plan.
  9. Pay your January 1st mortgage payment on or before December 31st: This allows you to take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you a 1098 form.
  10. Be careful about buying an actively managed mutual fund: The later it gets in the year, the more likely you will pick up the capital gains distributions on a mutual fund you hardly own. Check the distribution schedule and if it’s late in the year, wait before buying the fund.
  11. Teachers, take a deduction from your students: You can still take up to a $250 deduction on materials purchased to make the learning experience better for your students. This deduction is also applicable for principals and others who are employed in a school. If you’re not sure if this deduction applies to you, contact the IRS.
  12. If you’re self-employed, stock up: This is the time to buy all of the business equipment and supplies you haven’t yet purchased. Make sure to mark and save your receipts.
  13. Prepay your state and/or local taxes: If you don’t think your personal income tax bracket will be higher next year, and you’re not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
  14. Temporary bonus depreciation. Equipment, furniture, and vehicle purchases made before Dec. 31, 2010 will be eligible for the temporary bonus depreciation, which allows an extra 50% of the cost of the item to be depreciated in the first year it’s used in your business. This is especially beneficial for business-related passenger vehicles, she says, since, without the bonus amount, depreciation on them would be limited to less than $4,000 in the first year.
  15. 2010 deductions. The full cost of equipment and other expenses that are charged by Dec. 31 can be deducted on your 2010 tax return even though you won’t be paying the charge card bill until 2011. This is also true for items such as a car on which a loan is being paid off over time, Zobel says.
  16. Independent contractors. According to Zobel, if you’ve paid any person or business $600 or more for services or rent in 2010, you’ll need to give them a 1099 form by January 31, 2011. “My policy is to not pay anyone until I’ve gotten their address and Social Security number so that I don’t have to struggle to get this information close to the due date,” she says.
  17. Review estimated taxes. Have you paid enough in estimated tax payments? Although your fourth quarter estimated tax payment isn’t due until Jan. 15, 2011, Zobel says that one way to avoid underpayment penalties is to increase tax withholding for the remainder of 2010 if you or your spouse work at a job where you’re paid as an employee. “Withholding is considered to have been paid in equally throughout the year so it can reduce penalties for quarters in which you didn’t make estimated tax payments or paid less than you owed,” she says.

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