15 Ways to Reduce Your Taxes Before December 31
If you're anything like me, at this time of year I get stressed about gift giving. What's the perfect gift to give this family member?
What's the perfect gift to give the most important woman in my life? The tsunami of gift-giving anxiety can easily overwhelm anyone.
It didn't take long for me to come up with the perfect gift that almost anyone can use. Lower taxes, of course. Are you surprised?
Even though there are precious few days left and this year, there is still plenty of things you can do to reduce your tax liability for 2010. Here are my 15 gift-giving ideas to yourself:
If you're anything like me, at this time of year I get stressed about gift giving. What's the perfect gift to give this family member?
What's the perfect gift to give the most important woman in my life? The tsunami of gift-giving anxiety can easily overwhelm anyone.Even though there are precious few days left and this year, there is still plenty of things you can do to reduce your tax liability for 2010. Here are my 15 gift-giving ideas to yourself:
- Increase Retirement Contributions - Most of us have at least two or more paychecks remaining this year. Check with your employer to see if you can increase your contribution to your 401(k)/403(b) retirement plan. Your contributions will reduce your taxable wages for the year.
- Spend Your Pre-Tax Deductions - If you participate in a flexible spending account plan or a dependent care benefit plan where you work, check with your employer to see if you can increase your contributions before the year. Just like retirement savings, your contributions reduce your taxable wages. Be careful! These types of plans require that you "use it or lose it". If you don't spend the entire amount contributed to your account, you lose whatever you don't spend and may pay tax on whatever you leave in the account.
- Alimony - If you're fortunate enough to have a good relationship with your ex-spouse, this one is a "no-brainer". Talk to your ex-spouse to see if you can accelerate some of next year's alimony into December of this year. This can be helpful if you have higher than expected income in this year.
- Pre-Pay Business Expenses - Self-employed? Do you have more net profit than you want to pay tax on this year? I know that seems like a silly question given the state of the economy over the last few years. If this applies to you, you could look for some expenses you would normally pay next year and pay them in the current year. Expenses like office supplies, dues, subscriptions, airfare, convention attendance fees and the like can all be deductible in the current year.
- Maximize Capital Losses - Why would you want to "maximize" a loss.? It's a little play on words so, try to stay with me. In simplest terms, the maximum capital loss you can deduct in any one year is $3000 more than capital gains. If you've been fortunate enough to experience capital gains in your investment accounts, consult with your financial advisor to determine if any of your investments that are worthy of being dumped would result in a capital loss. Deductible capital losses can exceed capital gains by only $3,000. Be careful with this one and be sure to consult your financial advisor.
- IRA Distributions - Did you take advantage of President Obama's offer to forego taking your required minimum distribution from your IRA account in 2009? Unfortunately, skipping a required minimum distribution in 2010 is not an option. Consult with your financial advisor before the end of the year to be certain that you are in compliance. So, how is this a tax saving suggestion? Noncompliance with required minimum distributions carry very significant penalties. It's bad enough that taxes are as high as they are; I don't want you to pay a dime more than you absolutely must.
- SIMPLE Contributions - Many small businesses have adopted this type of retirement plan in the last few years. Perhaps you are an owner/employee of your own corporation or merely employed by a small business. The deadline for contributions to this type of account is December 31; no exceptions. If you want to make additional contributions, you 'll need to work with the payroll department and your employer to coordinate these additional deposits into your "nest egg". Your contributions will reduce your taxable wages and reduce your overall tax.
- HSA Contributions - As the health insurance crisis escalates in this country, Health Savings Accounts (HSA) have been growing in popularity over the last few years. While it is possible to make deductible contributions for 2010 on or before April 15, 2011, it never hurts to evaluate your current contributions. Consider contributing the maximum allowable amount to your account. Your contribution will be deductible against gross income and provides a significantly higher benefits than medical expenses as itemized deductions.
- Self-Employed Health Insurance - Self-employed individuals with qualifying medical insurance plans may be able to deduct those expenses from gross income as apposed to an itemize deduction. Make sure your premiums are paid by December 31 to maximize your deduction for the current year.
- Tuition & Fees Deduction & Education Credits - Is there a college student in the family? Pay for his/her tuition bills before the end of year to maximize your tax savings for the Tuition & Fees Deduction or the family of higher education credits. Check with your students college business office to be sure that your payments will be credited in the current year and reported on form 1099-T. Coordination of benefits between the deduction and credit programs is tricky business. Be sure to consult with your tax professional before tackling this beast.
- Dependent Care Credit - If you have children in daycare, make sure your fees are paid by year-end. This credit considers only the first $1,200 of expense per child for a maximum of $2,400 for no more than two children. You should also be sure to have your child care provider's Taxpayer Identification Number or Social Security Number on file. You'll need this information to claim the credit.
- Medical - Before you head to the cosmetic surgery center, pull back on the reins for this one. Most medical expenses are deductible. Medical expenses are part of itemized deductions and not all taxpayers qualify to itemize their deductions. To be deductible, the qualified medical expense must be paid by December 31. It's not enough to simply "incur" the expense; only the amounts that you actually pay will be reportable as an itemized deduction. If you have a large unpaid bill for which you've been making installment payments, only the total of your payments in the calendar year will qualify. On top of that, the total allowable medical deduction is limited to the amount exceeding 7.5% of your adjusted gross income.
- State & Local Income Taxes - Most of us understand that state and local income taxes that are withheld from our paychecks or deducted from other income such as pension and retirement payments are deductible as an itemized deduction. Some taxpayers manage payments of these taxes on their own by making payments to IRS and/or state revenue departments on prescribed dates throughout the year. The last and final installment is due on January 15, 2011. Consider mailing a check to your state revenue department on or before December 31 of this year. Payments made by this cut off will be deductible as an itemized deductions in the current year.
- Charitable Giving - "Charity sees the need, not the cause." (German Proverb). There's a surprisingly long list of methods and causes to which you can support that not only make your heart warm but also give you a tax deduction. Most taxpayers know that cash contributions to charities are deductible as itemized deductions. Most taxpayers also believe that the just about every "worthy cause" qualifies for the deduction. For the most part, qualifying exempt organizations are easy to recognize as they are icons of our everyday life. The Salvation Army, Goodwill, your local church, colleges & universities, local governments and municipalities are just a few examples. Just because you may believe in the mission or the purpose of an organization or you think it's a "worthy cause" doesn't make it a deductible contribution. Only organizations recognized by the federal government as "charitable-exempt organizations" are eligible for deductible contributions. Before you give, be sure that your organization or cause is qualified. Most charitable organizations can provide you with a copy of their charitable exempt organization certification by IRS. IRS also publishes a comprehensive list of all recognized charities which is available on their website. Just about anything can be contributed to a charitable organization to get a tax deduction. The most common gift is cash but, your contributions of personal property such as clothing, furniture and appliances also qualify. Property such as antiques, real estate, securities and art will also qualify. For non-cash gifts, limitations apply; so, contact your tax professional to determine the allowable deductible amount of your contribution.
Bonus Gift: Energy Tax Credit - Could you use a a $1,500 credit on your taxes this year? Purchase qualifying home-improvement material such as energy-efficient windows and doors, metal roofs or furnaces (natural gas, oil and biomass) qualifying for the credit program and you may be entitled to a 30% credit (maximum's lifetime $1500 credit) for your purchase.
Please accept my best wishes for a safe and happy holiday season. Please feel free to contact my office if you have any year-end tax concerns.
I am, as always, Father Tom.
I am, as always, Father Tom.
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