It's the end of the year, and while holiday baking may be top of mind, that niggling little task of getting the year-end tax tasks done is still there, bothering you over the scent of the fruitcake in the oven. The following tips will give you some specifics so you can take care of taxes, and then get back to your fun holiday activities.
IN PICTURES: Top 10 Solutions For A Big Tax Bill
- Defer Income Until 2011
With lower payroll taxes starting in January 2011, if you have income you can defer and report in the new year's taxes, do so. Hold your last batch of invoices and send them out in early 2011; save that bit of money by paying the 2011 tax rate.
- Contribute To A Retirement Plan
Whether you choose to convert your traditional IRA to a Roth IRA or not, make sure you contribute the maximum amount you can before the year's over. It's one of the easiest ways to save money on your taxes.
- Use Your Flexible Spending Account
If you have a flexible spending account (also known as a health savings account or medical/health care spending account), use up what's left in your account for 2010. And if you haven't opened one yet, check into what your company offers. Be sure to specify the amount of your 2011 wages that you want to have placed in your flexible spending account. (Learn more in the Benefits Of A Dependent Care Flexible Spending Account.)
- Invest In Your Business
If you need to make investments in your business - new equipment, upgraded machinery or real estate improvements - then invest before the year's end for the write-off on your 2010 taxes.
- Save Energy
Energy-efficient improvements in your residence before year's end can get you a tax credit of up to $1,500. Though installing a new metal or asphalt roof may be out of the question between now and January 1, you can purchase energy-efficient windows, doors and appliances. And if you're just itching for another home improvement project to tackle over the holidays, install a solar water heater or solar panels for another credit of up to 30% of the cost.
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- Itemize, Itemize, Itemize
Keep track of your business expenses and put them into your itemized deductions; don't forget home office purchases, supplies, fees for memberships in professional organizations, technological costs (web hosting, website design, internet costs). Be sure all your itemized costs are for the business and you have the receipts.
Make charitable donations before the year's end for the write-off, but don't make the mistake of sending out checks dated on or before December 31 and thinking they will qualify. The IRS specifies that checks mailed out must be postmarked by the last day of the year. You can also make donations through major credit cards, as long as the charges are authorized by the end of the year. (Generosity may be its own reward, but some charitable giving also provides personal tax benefits. Learn more in Deducting Your Donations.)
- Contribute To A College Savings Plan
Save for your kids and save on your taxes - up to $13,000 in 2010 for a college savings plan. The magic $13,000 limit keeps you under the federal gift tax.
- Pay Your Next Health Insurance Premium
If you're self-employed, you can deduct 100% of the cost of health insurance premiums (up to the total of the net earnings of your business). That can be a rather hefty deduction, since it includes costs for your spouse and dependents as well. You can pay ahead - cover your first premium of the new year in 2010, and you can claim it on your 2010 taxes. (Find out where you can take a tax deduction on the contributions you make; see Traditional IRA Deductibility Limits For 2010.)
- Pay Into A Specialized Account
Some employers offer the opportunity to contribute into specialized accounts, including dependent and commuter accounts. A dependent account covers the cost of child care, and a commuter account covers the cost of commuting expenses. Both have limits, but both can help you save on your taxes while paying for stuff you have to pay for anyway.
The Bottom Line
With taxes, you don't know until you ask. You may be able to save much more than you think you can just by making a few simple changes, or by paying for expenses in December instead of January, February or March. It's a little bit of forethought that can make the tax bill much more bearable.
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