While you're buying gifts and mailing cards there's one more thing to add to your "to do" list this holiday season – year-end tax planning. Following are 10 year-end tax tips to help reduce your anxiety and possibly lower your 2009 tax bill:
- Spend your FSA balance. If you set up a flexible spending account (FSA) and had money regularly withdrawn from your paychecks and deposited into the account, make sure you spend the money before January 1 or you risk losing it. Check with your human resources department if you're unsure about how much money you currently have in your FSA. Make doctor's appointments or purchase any necessary medical equipment or supplies now to use the savings you've accumulated.
- Get your paperwork in order. If your work or personal situation has not changed much since last year it shouldn't take too long to get your papers together in one place. Collect your paystubs or review your automatic paycheck deposits online if you do electronic banking. Gather your investment account statements as well as receipts for expenses you have incurred that would qualify for tax credits or deductions. Start a file for documents you will receive shortly after the New Year that you'll need when filing your taxes. (For more tax tips, check out Give Your Taxes Some Credit.)
- Calculate your current tax situation. Once you have collected your paperwork, do a quick review to compare your take-home pay and taxes already withheld in 2009 to your 2008 return. If your income or expenses have changed significantly this year – for example, if you have lost your job, taken a pay cut, divorced or liquidated investments to start a new business – you may want to estimate your regular income tax using IRS Form 1040. If you think you may be subject to the alternative minimum tax (AMT) use IRS Form 6251 to estimate your tax liability.
If you have done the tax calculations and determined that at your current pace you're going to owe Uncle Sam money come April 15, there are steps you can take now to lower that bill, such as:
- Give or donate. You - and your spouse - are each allowed to give up to $13,000 (for a total of $26,000) to as many people as you would like without having to pay gift taxes. In addition, you can only claim a tax deduction for charitable contributions if you make it before January 1. If your donation is worth more than $250, get the receipt from the organization to which you are donating and make an itemized list with each items' estimated fair market value (FMV).
- Invest. Deposit money in your retirement plans to meet the yearly maximums:
- The 401k contribution limit is $16,500 or $22,000 if you are age 50 or older
- The IRA contribution limit is $5,000 or $6,000 if you are over 50
- The Simple IRA limit is $11,500 or $14,000 if you are age 50 or older
- 403b and 456 plan contribution limits are $16,500 or $22,000 if you are age 50 or older
You can also open up, or contribute to, a college savings plan such as a 529 Plan to both take the tax deduction and invest money to grow tax-free for a child or grandchild's future college bill. (For more, check out Five Tax(ing) Retirement Mistakes.)
- Postpone your pay. If possible, see if you can get clients or customers to defer paying you for the last month - or more - of work in 2009 until 2010. If you expect to get a bonus ask your boss to hold off paying it until after the New Year.
- Check your investments. Review your most recent portfolio statement to see how your investments have fared so far this year. If you have incurred some losses, make the most of it. Realize your tax losses before the New Year to offset any long-term capital gains.
- Make another mortgage payment. If you think you're going to need to lower your taxes, make an additional mortgage payment in December so you can deduct the additional interest paid. Make sure that the additional interest payment is noted on Form 1098 that you receive from your lender/mortgage servicer.
- Prepay taxes. If you prepay any 2010 taxes (i.e. property taxes, state and/or local taxes, etc.) before January 1, you can deduct that amount from your 2009 taxes.
- Take advantage of tax credits. There are numerous potential tax credits you may be able to benefit from if you make the necessary purchases or investments before January 1. For example, if you have a college student you may be able to get a tax credit of up $2,500 for qualified education-related costs you incurred such as textbooks, tuition, a computer etc. through the American opportunity tax credit. You could qualify for state or utility rebates and a federal tax credit of up to 30 percent of the product cost for any qualifying energy-efficient windows, doors, or skylights.
The most important end-of-year tax tip, however, is to know your own personal tax situation. Not every tip will help - and in fact, using a few could hurt depending on your tax status. For example, if you are subject to the AMT, prepaying your taxes and delaying income payments won't actually be a benefit and could increase your 2010 tax bill. If you are behind on paying taxes or unsure about how to estimate your tax bill consider calling a CPA or tax professional so you can make the best decision for your situation.
TaxesYour volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
TaxesCheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
TaxesAll taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
Savings529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
TaxesThe W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
RetirementLearn about the pros and cons of non-qualified deferred compensation (NQDC) plans, including the flexibility of non-ERISA plans and the potential for forfeiture.
TaxesLearn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
TaxesGetting organized well before the deadline will curb your frustration and your tax liability.
TaxesIt's never too early to prepare for tax season. Next year features a host of tax law changes. Check our handy list to see which ones apply to you.
A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
Traditional 401(k) contributions effectively reduce both adjusted gross income (AGI) and modified adjusted gross income (MAGI). ... Read Full Answer >>
While your fire or homeowners' insurance premiums may be included in your property payments, they are nondeductible expenses, ... Read Full Answer >>
The Personal Finance Society (PFS) and with Her Majesty's Revenue and Customs (HMRC) have outlined when a value-added tax ... Read Full Answer >>
Cafeteria plans are employer-sponsored benefit plans that provide both taxable and nontaxable, or qualified, benefit options ... Read Full Answer >>