The holiday season is in full swing, and while your children’s heads may be filled with visions of sugarplums, yours is probably full of nightmares about the upcoming tax season. The holidays are expensive, and while hitting up the sales rack may save you a few bucks, the real savings this time of year come from strategic tax planning. Although most of us would probably prefer to be out in the snow than inside worrying about Uncle Sam and the IRS, you may be surprised to see how much money holiday season tax planning can save you.
1. ‘Tis the Season to Give
We all know that making a charitable donation can help lower your tax bill. Unfortunately, many families have cut back on charitable contributions this year because of the economy. However, after you review your financial documents you might need to make a few more donations to keep your tax liability low. The holiday season presents many excellent opportunities to give, from toy drives to coats for kids campaigns. Just be sure you are donating to a qualified charity, otherwise you might not be able to claim the deduction.
2. Purge & Organize Records
Getting your tax records organized before New Year’s Eve could be very beneficial in your tax planning efforts. Set aside some time to go through all of your financial documents and shred anything you no longer need. Then, you can calculate your total tax liability and determine if you need to take any last minute actions to reduce your adjusted gross income or increase the benefit of a tax credit.
3. The Office Holiday Party
Small business owners may get carried away while planning a seasonal party for your valued employees. Luckily, the IRS allows business owners to deduct some costs for parties and holiday gifts for your employees.
4. Gifts from Your Boss
If you work as a wage earning employee, then you might be getting a holiday or end-of-year gift from your employer. Most small gifts will not have tax implications. However, if your boss gives you a cash bonus, then you will have to claim it as income on your tax return.
5. Pay the Doctor
If you fell getting off the bunny slope, or threw out your back hanging Christmas lights on your house, then you may want to pay those medical bills sooner rather than later. If your yearly medical expenses exceed 7.5% of your adjusted gross income, you can deduct the expenses on your tax return. If your current expenses are a little shy of the deduction threshold, buying a new pair of glasses or an extra prescription could help reduce your tax liability.
6. Defer Now, Save Later
Self-employed taxpayers and small business owners may be able to defer some income until next year. Simply hold off on sending out a few invoices until after Christmas. This can reduce your taxable income for 2009 and give your clients the gift of more time to pay. Remember, this simply pushes the income off until next year, so this is not the best move for everyone. Wage-earning employees generally cannot take advantage of deferred income.
7. Smart Savings
If you have an IRA or retirement account that allows you to make tax-free contributions, then you check to see if you have maxed out your contributions for the year. If not, making a few extra contributions in December is a great way to lower your taxable income.
8. Look at Losses
In between shopping and decorating for the holidays, you should also take a few minutes to look over any stock market gains or losses for the year. If you have an especially high net capital gain, it might be beneficial to sell some stocks before the New Year begins. Capital losses can offset any capital gains, and you can deduct up to $3,000 in losses against regular income. Of course, you should never sell an investment for tax purposes alone, and you should speak with a tax professional.
9. Give Yourself an Extra Mortgage Payment
Although money is usually pretty tight around the holidays, if you can find a way to make an extra mortgage payment before the end of the year, you can save money on your taxes. Mortgage interest is 100% tax deductible, and the deduction is claimed when the interest is paid, regardless of when it was due.
10. The Un-welcome Gift Tax
If you are feeling extra generous and intend to give a large sum of money to a child or relative for the holidays, remember that the IRS taxes gifts over $13,000 per year (as of 2009). Speak with a tax professional if you need guidance on avoiding this nasty tax. Alternatively, the IRS does not place limits on funds used to pay for someone else’s education or medical expenses, and what better gift could there be than health and education?
