Trimming your Tax Liability Before the End of the Year

This year, end of the year tax planning has become even more confusing. Why? Because Congress continues to stall on taking any action on the Bush tax cuts; this inaction could result in significant tax increases on all Americans.

Obama's Compromise

President Obama put together a deal with Republican leaders last week to extend all of the Bush tax cuts for two more years. The compromise also included an extension of unemployment benefits and stopped the estate tax from increasing to 55% in 2011. However, the House of Representatives rejected the bill and have yet to pass any other tax legislation.

Why the Uncertainty is Problematic

Tax planning in prior years has always been pretty straightforward. Make donations to charities; make an extra mortgage payment, max out on your 401(k) contributions etc. However, with the possibility of a tax rate increase some experts are suggesting taxpayers wait until next year.

If your tax rate does increase next year, then it would be better to defer any deductions to 2011, when they will be more valuable. Deductions lower your taxable income, unlike credits, which are dollar for dollar benefits, so if tax rate goes up in 2011 then all of the standard end of the year deductions might be worth more if you wait until January.

What you CAN do

Although many tax laws are up in the air, there are some things you can do now that will help lower your tax liability without worry about next year’s tax rates. First of all, if you are a homeowner then you might want to consider making energy-saving improvements to your home such as adding dual pane windows or purchasing an Energy Star water heater or air conditioning system. The 30% (up to $1,500) tax credit is scheduled to expire at the end of the year. For more information on qualifying expenses, check out EnergyStar.gov.

Other Uncertain Tax Benefits

The energy credit isn't the only tax incentive currently in limbo. The new health care legislation will ban using funds from flexible spending accounts to purchase over the counter medication and claim it as a deduction starting in 2011. If you qualify for the medical expense deduction then it might be a good idea to stock up on your over the counter meds while you can still deduct the expenses.

Another deduction that might expire at the end of the year is the $250 deduction for educators. If you are a teacher, or work in a classroom then be sure to take advantage of this classroom expense deduction while you can.

Questions for the Tax Lady: November 9th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I'm going to be moving soon and I have boxes full of old pay stubs and receipts that I've had for at least ten years. How long should I hold onto these tax records? Do I need to move them all to my new place?

Answer: Ah, yes, I think we all have boxes of records we no longer need but are terrified to throw away. There are different rules for how long you need to keep various tax-related records. For your paystubs, anything over a year old, you can shred.

Question: I do not want to have a large tax bill next April. What are the easiest end-of-the-year tax planning moves to make?

Answer: The best thing you can do right now to ensure your tax bill will be manageable: Do a tax dry run. Use the information you have now – like income, tax payments, educated estimates about expenses and deductions – and see what your tax bill looks like. You may want to try using a tax calculator to see what your estimated tax bill looks like.

If your dry run shows you will owe a big chunk of change, you can make some charitable contributions, make your January mortgage payment before the end of the year, or take advantage of soon-to-be-expiring tax credits for making green upgrades to your home. You still have plenty of time to make these simple money-saving tax moves and reduce your tax bill come April.

If you are looking at a big fat refund check, adjust your tax withholding and enjoy the extra cash now, when you probably need it most. Then next year, adjust your withholding to just cover your projected tax bill, and keep more cash in your pocket every month.

10 Ways to Reduce your Tax Liability in Under 10 Minutes

Last week the RDTC Tax Help Blog posted a helpful article for anyone looking to lower their taxable income before the end of the year. In addition to the standard end of the year tax tips, the blog even provides links to charities that accept donations online, and banks that will allow you to setup college saving funds online. I have included a few tips below, but be sure to check out the full article here.

Electronic Mortgage Payments

If you can make your mortgage payment online, then you might want to make an extra mortgage payment before the end of the year. Since the IRS allows you to deduct all mortgage interest, this could significantly lower your taxable income for the year. However, if you make the payment close to the end of the year then you will want to be sure and double check the 1098 Form you receive from your lender to ensure it includes the last minute payment.

Make State and Local Tax Payments

The IRS allows you to deduct all taxes paid to state and local governments. If you know that you are going to owe, then you might want to consider making an estimated payment before the end of the year. Check out your local tax agency’s website to see if they accept payments online, or they might have a phone number that you can call to make a payment with your credit card.

Order Energy Efficient Home Upgrades

The IRS offers a credit of 30% of the cost of qualified energy efficient home upgrades, up to $1,500. Although the credit applies to upgrades such as roofs and insulation, certain water heaters, windows, doors, and air conditioning units qualify as well. If you are in need of any of the aforementioned products then you could make your purchase from Lowes.com or HomeDepot.com in a matter of minutes. However, before you pull out your credit card be sure to check out this page on EnergyStar.gov explaining the Federal tax credit.

Splurge on Office Supplies and Furniture

If you are a small business owner and have an office or store for your business, then you can greatly reduce your taxable income within a few minutes by splurging on new office supplies and furniture. There are lots of great office furniture websites, and some that will even deliver and setup the furniture for you. In just a few minutes, you could easily reduce your tax liability by thousands of dollars.

Continued at RDTC.com…

Top 10 End of the Year Tax Planning Tips

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.

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Last-Minute Year-End Tax Tips

The other day I was mentioned in an article on BMighty.com about end of the year tax tips. The article goes over different ways you can try to reduce your total federal tax liability before the beginning of 2009. Below is a quote that includes my advice, but for the full article click here.

The No. 1 recommendations made by many tax experts is to make capital investments now rather than put them off. A change to the 2008 Federal Tax Code has resulted in a historically high write-off maximum of $250,000 for tangible property. So now could be the time to do that much-needed upgrade of your equipment, such as computers, telephone systems, even furniture. All of your business-related gear is deductible, there are tons of sales going on, and if you charge the purchases to a credit card, you can claim the deductible for this year yet not have to pay off the charge until next year -- and, as tax attorney Roni Deutch points out, you might even qualify for credit card rewards.

Top 10 End of the Year Tax Tips

As the holidays approach and this long, but historical, year comes to a close, there is no better time to prepare early for next tax season. Our country’s economic outlook may seem dreary, but there are still plenty of ways to save money on your taxes. To help the readers of my blog better manage their bucks in both the present and the future, I have compiled the following list of the top 10 end of the year tax tips.

1. Charge It

Paying deductible expenses with a credit card before December 31st will allow you to claim the deduction this year. You can also wait until next year to pay off the charges. You also may qualify for credit card rewards.

2. DE-fer! DE-fer!

To keep your taxable income and liability down, try deferring some of your income until next year. This tip is easiest to for those of you who are self-employed, but many others can benefit from it as well.

3. Mortgage Payments

By making your next mortgage payment before the end of the year, you can take a higher interest deduction this year. However, remember that you will have one less mortgage payment to claim next year.

4. Get your Finances in Order

Conduct a thorough review of your income, expenses, deductions, and financial portfolio. You cannot reduce your income tax liability at all until you are crystal clear on just what your financial situation is. It can be helpful to get this done before the end of the year, that way you are not running around at the last minute looking for important financial documents.

5. Get Married, Already!

A lot of couples are planning on getting married in early 2009. However, if you decide to have the wedding in late 2008, you get to claim Married, Filing Jointly status on your 2008 return. This could lead to more favorable tax consequences (e.g. additional exemption, etc.)

6. Remember Retirement

Make “catch-up” 401(k) and IRA contributions if your contribution level is less than the maximum allowed (and if your plan will let you do it). This will not only benefit you in the long run with an ample retirement fund, but it will also lower your taxable income for this year.

7. The Season of Giving

Not only is it good for the heart to make charitable contributions, but it can also be good for your wallet! Make sure to collect all receipts for any charity contributions you have made this year, and if you have not made any yet then – well, ‘tis the season!

8. Prepay State and City Taxes

Remember, you can deduct all state and city taxes that you pay. So prepaying any state or local taxes you might owe before the end of the year means that you can deduct it from this year’s federal tax return.

9. Stock Up

If you own a business, or are self-employed, then now is the perfect time to stock up new supplies. You can deduct all of these expenses, plus at the time of the year many stores offer large holiday discounts. So by purchasing these items now you might be able to save a little money!

10. Check, Re-Check your Withholding

At the end of the year it’s a good idea to check, and double-check, your withholdings to assure that you are paying the exact amount you should be. It might not make an affect on your upcoming tax return, but it can get you on the right track for the next tax season.