Although you may be used to waiting until April to worry about your taxes, this could be a big mistake. Many tax breaks are secured through actions taken before January 1. And guess what – it is already November and the holidays are just a few weeks away! So, you need to take advantage of the pre-Thanksgiving lull to get your tax situation in order to maximize your tax savings come next April. And as you can see from the following paragraphs, there are plenty of things you can do now to make the upcoming tax season a little less stressful—and a finacially successful one.
1. Make Upgrades
If you were thinking about making energy efficient upgrades to your home, you may want to do so before the New Year. The deductions and credits available for energy efficient home upgrades are larger this year than they were in 2008, and it is unknown if Congress will extend or decrease those credits for 2010. For more information on this year’s “Green” tax incentives, check out this entry I posted earlier in the year.
2. Give Now
During the holiday season, most of us feel more charitable then usual, with toy drives for underprivileged children and Santa Clauses asking for donations on every street corner. However, this time of the year is also the last time you can make a charitable donation and deduct the amount from your 2009 taxable income. Be sure to take a minute to look over your donation receipts from this year so far to see if you making a few extra donations will significantly reduce your tax liability or not.
3. Make 529 Contributions
If you have children, then you might want to consider opening a 529 plan, or if you already have one setup then you could max out your contributions. There are two different types of 529 plans, but both have significant tax benefits. Using any extra funds you have at the end of the year to help pay for future college bills is a great, and tax friendly way to prepare for the future. To learn more about the different 529 plans check out this RDTC Tax Help Blog entry on tax friendly ways to save for your children’s education.
4. Offset Large Capital Gains
If you had a high amount of capital gains related income, then you may want to offset your profits by selling off a few bad investments or stocks. You can then claim a capital loss and reduce your taxable income. However, keep in mind there is a $3,000 limit—but the rest can be carried forward into future tax years. Alternatively, you can offset your losers by selling off some winners. If you are not experienced with capital gains and losses, then I highly recommend seeking the help of a qualified professional.
5. Non-Charitable Gifts
It is the season of giving, right? In addition to charitable contributions you can also give up to $12,000 ($24,000 for a married couple) to as many individuals as you wish without incurring a gift tax penalty.
6. Get in Order
With the New Year just around the corner, it is never too early to begin getting your financial records organized for next tax season. By knowing exactly how much money you have made this year, and projecting your total taxable income for the end of the year, you can decide if you need to take any actions concerning income and expenses to further lower your tax liability or not. You can also throw away any files that are old or unnecessary, and create a new folder in your filing cabinet for 2010.
7. Adjust Withholdings
If after reviewing your taxable income, you realize that your tax bill will be higher than you had expected, now is your last chance to have your employer adjust your withholdings. It will mean less cash in your remaining paychecks for the year, but at least you will not be hit with a massive tax bill come April. On the other hand, if you have overpaid your taxes throughout the year then you could lower your withholdings and get a little extra holiday cash.
8. Prepay Mortgage and Taxes
If you are looking for ways to increase deductions and lower your taxable income, then you can always prepay your next mortgage payment, or pay your property taxes early. Just remember though that this means you will have one less mortgage payment to make next year, which will result in a higher tax bill in April 2011.
9. Retirement Payments
If you have not contributed the maximum to your 401(k) or another tax friendly retirement account, then you want to do so before the years end. This will help lower your taxable income, and is also a good investment in your future.
10. Deferred Income
Deferring income is one of the most popular end of the year tax planning tips, and it is actually pretty easy. If you are retired then you could postpone an IRA withdrawal, or if you are self-employed then you can easily defer a payment from a client. However, before you defer any income you want to be absolutely sure that you will be in a lower tax bracket next year. Otherwise you could just be postponing a large tax bill.