For most people, dealing with income taxes is a dreaded chore, especially before the current tax year ends. However, there are a number of tax moves you could make before Dec. 31 that could pay dividends when that April 15 tax deadline comes around. To help you get your personal taxes in order, Kay Bell, tax specialist with Bankrate.com, shares 10 steps you could take to garner a more favorable tax filing. Perhaps you'll receive a larger refund or owe less taxes; either way, you will benefit from being prepared!
Rollover Your Earnings
Stating the obvious, the less income you make, the less taxable income you have to report. "This works really well for the self-employed," Bell says. Therefore, she says to hold your December invoices until January. For salaried employees, Bell recommends asking the boss to hand out any holiday bonus in January.
Invest In Your Retirement
Because there are no taxes on 401K funds, depositing extra monies into these accounts could reduce your taxable income, Bell says. Talk with your human resources department on how to handle this, and find out the maximum amount you are allowed to contribute. Also, check with your tax professional on the maximum amount you can deposit in your IRAs.
Go to the Doctor
Past due for a yearly medical checkup, dental cleaning or eye exam? Review your flexible spending account, or FSA, for medical expenses, and use these funds now before you lose them. "Check to see if you have a grace period beyond Dec. 31 to spend it," Bell says. "Don't waste this tax move. It's tax-free money because it's taken out of your income before taxes."
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Turn Loss Into Gain
If you have assets such as mutual funds or stocks that lost money this year, consider selling them, Bell says. "Use losses to offset gains from other assets," she adds. "You can reduce taxes paid on those gains." You also can use up to $3,000 in asset losses against ordinary income, she says, but check with a tax professional for specific advice on your situation.
Make the Most of Your Home
Making home improvements such as installing energy-efficient insulation or windows could result in federal tax credits on your taxes. However, all work must be done by Dec. 31. Visit EnergyStar.gov for lists of federal credits and requirements; also check your local state tax department for any local credits on large appliances or other home improvements.
Get a Group Together
Review your expenses and consolidate those you can into one lump sum. For example, add up all of your medical expenses for the year. If they total 10 percent or more of your total adjusted income, they can be deducted, Bell says. Likewise, add up all of your non-reimbursable business expenses (think professional memberships, uniforms, trade magazine subscriptions, conferences, etc.); if the total is 2 percent or more of your adjusted income, you can deduct it.
For states that have no state income tax, Bell suggests purchasing those big-ticket items you want, such as a car, boat or RV, because you can deduct the sales tax. To determine if this is a good move for you, review the tax schedules at IRS.gov and consult your tax professional.
Donating to charitable organizations provides a quick and easy tax deduction provided you go about it the right way. First, instead of dropping money in a bucket, Bell says to write a check so you'll have a record of the donation. Second, if donating clothes, food or other items, she says to request a receipt so you'll have written documentation of the donation.
Get A Head Start on Tuition
Prepaying for college can result in tax savings now. Using the American Opportunity Tax Credit, you can receive a credit of up to $2,500 per student. The caveat, Bell says, is you must pay tuition for classes in the first quarter of the upcoming year, and it can only be used for the first quarter of the year. To determine the amount of your credit, complete the related worksheet on IRS.gov.
Adjust Your Withholding
Review your current withholding to see if you are claiming too much or too little in your paycheck. "If you expect a tax refund, it may be worth it to change your withholding to increase your take-home pay instead of waiting for a refund," Bell says. "It's your money; you might as well have it." Likewise, if you are always paying taxes, check your withholding to see if you can have more taken out during the year.