Tax planning is a year-round process. However, if you haven't done everything you can to minimize your tax burden, don't despair. As the year winds down, here are some steps you can take to cut your tax bill.

SEE: Next Season, File Taxes On Your Own

Max Out Your Retirement Contributions
If you work for a company that offers a retirement plan with salary deferral features, such as a 401(k) plan or 403(b) plan, take a look at how much you're on track to contribute to your account this year.

For 2009, your maximum salary deferral contribution is $16,500. Anyone aged 50 or older by December 31, 2009, can make additional catch-up contributions of $5,500 for 2009. You have until the end of the year to increase your salary deferrals if you haven't been contributing at the maximum rate throughout the year. Salary deferral contributions made on a pretax basis reduce your taxable income for the year. (To find out more about these contributions, read Making Salary Deferral Contributions - Part 1 and Part 2.)

Are you self-employed? Assuming you have no non-owner employees who work for your business 1,000 hours or more per year, consider setting up a self-employed 401(k) plan by December 31, 2009. With these tax-advantaged retirement accounts, self-employed individuals can contribute $16,500 plus 20% of their adjusted net profit or 25% of W-2 wages, up to a total of $49,000 for 2009. For individuals 50 or older by the end of the year, the maximum contribution increases to $54,500. (To read more, see IRA Contributions: Deductions and Tax Credits, Tax-Saving Advice For IRA Holders, 401(k) Plans For The Small-Business Owner.)

Time Your Expenditures
For tax purposes, most peopleuse the cash basis of accounting, which means that you can claim a deduction based on the date you pay your bills. For payments made by check, the date the check is mailed determines deductibility. Items paid with credit cards are deductible in the year the transaction is charged to your account. As the year winds down, you need to decide whether to pay for certain items prior to December 31, 2009, or wait until after New Year's Day.

If you're a homeowner, consider sending in your January 2010 mortgage payment early enough so that it will be processed prior to December 31, 2009. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier. (To learn more, read The Mortgage Interest Tax Deduction.)

And if you'll be itemizing your deductions this year, certain expenses are deductible to the extent that they exceed a percentage of your adjusted gross income (AGI). For instance, you can deduct medical expenses that exceed 7.5% of your AGI, and miscellaneous itemized deductions, including investment fees and unreimbursed employee business expenses, that exceed 2% of your income. If you meet either of these thresholds, consider paying other outstanding bills before December 31, 2009. (To find out more yearly tax tips, check out Money Saving Year-End Tax Tips.)

Gifts To Charities
Donations to charities are deductible as itemized deductions. Prior to December 31, clean out your closets and donate your clothing and household items to a charitable organizations, as you can deduct these "non-cash" contributions based on their fair market values. Don't forget to get a receipt, and be sure to list the goods you donate, including the condition of each item. Under the new rules, only non-cash contributions in "good or better" condition count.

For gifts of money, making your donation by credit card before December 31, 2009, allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2010. However, if you do pay by credit card and don't pay off the bill at the end of the month, remember that you will be paying interest on your donation – in effect, paying money to donate money. So, if it isn't worth the tax deduction, be very hesitant to use this method of payment for donations.

Finally, you always have the option of donating appreciated investments to charities. You get to claim your deduction based on the value of the assets donated, without paying any capital gains taxes on the appreciation. (Keep reading about donations in Deducting Your Donations, It Is Better To Give AND Receive and The Christmas Saints Of Wall Street.)

Pay Enough Taxes
If you are required to pay estimated taxes for the year, now is the time to take a look at your withholding tax to date and instruct your employer to take out additional taxes from your salary if you haven't had enough taxes withheld during the year. This will help to avoid getting hit with a penalty for underpayment of estimated taxes. Unfortunately, money is always tighter during the holiday season, so if you can't pay for the extra tax now, it may make sense to wait and be hit with the tax later.

Generally, you are required to make estimated tax payments for 2009, if:

  1. you expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits and
  2. you expect your withholdings and credits to be less than the smaller of:
  • 0% of your current year's tax liability or
  • 100% (110% for people whose AGI exceeds a certain amount in 2008, depending on their tax filing status) of the prior year's tax liability.

(For more information, check out IRS Publication 505.)

Another way to cut your tax bill is to prepay your projected state tax shortfall if you'll be itemizing your deductions and will not be subject to the alternative minimum tax.

Sell Your Losers
Do you own any investments in your non-retirement accounts that have decreased in value? If so, consider selling some of your losers - your capital losses can offset the taxes owed on capital gains realized during the year, including capital gain distributions from your mutual funds. You can then claim up to $3,000 ($1,500 if you are married filing separately) in additional capital losses against your wages and other income. Any additional losses are carried forward to next year. Just make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS may disallow the loss under the wash sale rules. (To find out more ways to cut your taxes, read Common Tax Questions Answered and Tax Tips For The Individual Investor.)

The Last Step
Before finalizing your year-end strategies, evaluate whether you'll save any taxes by postponing 2009 income or deductions into 2010 or by accelerating 2010 income or deductions into 2009 where possible.

Related Articles
  1. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  2. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  3. Credit & Loans

    Don't Get Burned by High Credit Card Rates

    The average card charges 11.8%, and some rates top 20%. Experts warn that credit card interest may remain steep.
  4. Taxes

    What IRS Form 990 Tells About a Nonprofit

    Want a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
  5. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  6. Taxes

    Top Reasons to File Separately When Married

    Most of the time, it makes sense for couples to file their taxes jointly. Except for these possible exceptions...
  7. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  8. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  9. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  10. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
RELATED TERMS
  1. Transferable Points Programs

    With transferable points programs, customers earn points by using ...
  2. Duty Free

    Goods that international travelers can purchase without paying ...
  3. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  4. Wealth Management

    A high-level professional service that combines financial/investment ...
  5. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  6. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!