2011 is almost over and that means tax time is fast approaching. If you're like most, you probably said that you would do a better job at keeping track of receipts and making financial decisions with your tax liability in mind. If you once again fell short of that goal in 2011, don't worry. The year isn't over yet and you have plenty of time to make some tax-smart decisions before ringing in 2012. (For related reading, see 10 Steps To Tax Preparation.)
TUTORIAL: Personal Income Tax Guide
Give to Charity
Giving to charity allows you to deduct some or all of your donation equal to your tax rate. If your tax rate is 28%, 28 cents of every dollar you donate will be counted towards your total deduction.
If you have stock that you have owned for more than one year, donating a portion of that allows for an additional tax advantage. If you purchased $2,000 worth of stock that is now worth $4,000, you can donate your original investment and not only receive a tax deduction of $2,000 but you also don't have to pay capital gains taxes on the money you made. This is a common way that higher net worth individuals make donations without paying any more out of pocket.
The IRS rules regarding charitable contributions are complicated. Make sure you're donating to approved charities and that you're not going over the maximum amount allowed. (To learn more, read Cut Your Tax Bill With Donor-Advised Funds.)
Examine Your Records
The ball will drop on December 31 and it will be out with 2011 and in with 2012. It will also mean the end of your holiday season vacation and a return to the daily rituals that include long days at work and family responsibilities.
Don't procrastinate this year. While you have a day or two off from work, go through all of your bank and credit card statements as well as the receipts you actually did save and make a list of deductions you will itemize when you complete your 2011 taxes. Keep that list with you and add prior to completing your tax return.
If you're like most, you haven't done as good of a job as you would have liked keeping a running list of deductions. Don't cheat yourself out of deductions that you deserve because you didn't prepare for the tax season. (For more information, read Tax Deductions You May Be Missing.)
Fund Your Retirement
Although you can make contributions to your IRA through Apr. 16, 2012, the sooner you fund your IRA, the sooner your contribution can start working for you. In 2011, you can contribute up to $5,000, or $6000 if you are 50 years of age or older by the end of 2011, to your IRA without penalty and because the gains appreciate tax free, aim for the maximum each year.
Add up Your Miles
In the past, how often have you lost out on valuable mileage deductions because you didn't keep accurate records? You can deduct un-reimbursed miles that you drive for work, mileage for work that you do for a qualified charity, mileage associated with a long distance move and mileage for your business. Not all miles are deducted at the same rate, so check the IRS publication for the correct rates for each type of mileage deduction.
The Bottom Line
You certainly wouldn't be one of those people who over exaggerates his or her deductions, but some people do and the IRS is aware of that. The IRS publishes the average deductions claimed by American households. If you claim deductions more than approximately 20% higher than the average of households in your income bracket, make sure you have proper documentation in case of an IRS audit. (For related reading, see Surviving The IRS Audit.)