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 If you set up a flexible spending account (FSA) and had money regularly withdrawn from your paychecks and deposited into the account, make sure you spend the money before January 1 or you risk losing it.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.