1.
Check and adjust your paycheck withholding.
You
hear it every year because it's true: Check your payroll withholding. If
you don't have enough taxes taken out of your paycheck, you could end up
owing the Internal Revenue Service more in penalties and interest.
Withholding adjustments are especially critical if circumstances in your
life have changed -- you got married, had a child, bought a house or are
expecting a large bonus at the end of the year.
Take
a few minutes to check your last pay stub and see how much has been taken
out so far. Then pull out last year's tax return. If your lifestyle hasn't
changed dramatically, a quick comparison should tell you if the total
amount withheld by year end will be close to what you expect your coming
tax bill to be. If too much tax is being taken out, put cash back in your
pocket by increasing exemptions on your W-4 to reduce withholding.
If
you're not having enough withheld, you can prevent a huge tax bill on
April 15 by reducing exemptions. You can even direct your boss to take out
an additional, specific dollar amount in taxes from your remaining
paychecks to prevent you from facing any under withholding penalties at
tax-filing time.
2.
Home tax breaks
Some
year-end planning when it comes to tax-deductible home costs also can cut
your impending IRS bill. Your Jan. 1st mortgage payment actually
represents interest for the month of December, so make the payment before
the 31st. By accelerating the payment you get an additional deduction this
tax year for the interest paid.
Some
tax professionals say you can simply mail your extra mortgage payment by
Dec. 31 and have it count. However, if you actually get your payment to
the bank by the last business day of the year (or a day or two early), the
extra interest will show up on the lender's official paperwork. And that
means no curious tax examiner will question any difference between the
amount you claim on your Schedule A and what your lender reports on the
Form 1098 he'll send you (and the IRS) in late January with details of
your deductible mortgage activity. If
your year-end mortgage statement doesn't reflect the extra payment's
interest, go ahead and deduct the correct amount on your tax return and
attach a statement explaining why your number, not the lender's, is
accurate.
The
same approach also applies to deductible property taxes. If your county or
municipal tax collector will take your tax payment (or part of it) now,
pay it to accelerate the tax benefits. Of course, this only works if you
pay real estate taxes yourself, rather than having your lender pay them
from an escrow account.
While
you're making early property tax payments, don't overlook any other state
or local taxes you can pay now and deduct against your upcoming federal
tax bill. This works especially well if you pay estimated income taxes to
your state treasury; by making the final quarterly payment in December
instead of the January due date, you shift the tax benefit into this year.
A
word of warning about shifting state tax payments: alternative minimum
tax. State, local and real property taxes are not deductible when
calculating AMT.
3.
Evaluate your stock portfolio
See
where you stand overall and with short-term and long-term gains and
losses. Investors got some good news this year when law changes cut the
long-term capital gains rate to 15 percent for assets sold May 6 or later.
(Property sold before then is taxed at the slightly higher old capital
gains rates.) That same legislation also reduced taxes on dividends.
Previously, dividend earnings were taxed at the ordinary income rate,
which could be as high as 35 percent; now most dividends are taxed at 15
percent. Also, any installment payments received after May 5th are
taxed at the lower rates.
4.
Give, Give, Give!
Since
the holidays are the time for giving, add your name to your tax gift list
by donating to your favorite charity. Itemized gifts of cash or goods can
be deducted to reduce your tax liability. Similar to a tax tip earlier
this year, items left over from a garage sale, unwanted things cluttering
the closet or perhaps moving to a smaller house can benefit your tax
situation.
Consider
donating some stock, especially if during your portfolio review you
discovered one you've held a while but which is struggling to gain value
in the current market. If you sell that appreciated -- but currently
disappointing -- stock, it would cost you capital gains taxes. But if you
donate it, you would be able to deduct the current market value of your
stock gift before it drops any lower.
5.
Charity begins at home
Your
tax-beneficial giving doesn't have to stop with contributions to nonprofit
organizations. If you have a large estate and want to reduce the tax
burden on it, you can give up to $11,000 (cash or property) to each child
or grandchild each year without being subject to the federal gift tax.
Your spouse can do the same, bringing your limit up to $22,000. Actually,
such tax-free gifts aren't limited to relatives, but many taxpayers with
numerous assets opt to keep the wealth within the family.
6.
Maximize medical deductions
You've
got another December 31 deadline to meet if you want to get the most out
of itemized medical deductions. Medical and dental expenses can help take
a chunk out of your tax bill, but only if you have enough of them. IRS
rules say you can't count these deductions unless they exceed 7.5 percent
of your adjusted gross income. If you make $50,000 that means you get no
tax benefit until your medical costs exceed more than $3,750.
You
still have time to reach the earnings cutoff. If you've been putting off
that elective surgery or dental procedures and can afford it, schedule the
procedure before the year's end to bump your medical bills up to the
deductibility threshold.
7.
Make early miscellaneous payments
Miscellaneous
deductions -- union or professional dues, tax preparation and investment
advisory fees, legal and accounting fees, job-related equipment and
educational expenses, or subscriptions to business publications -- also
can help cut your taxes. They, too, must meet a percentage of your
adjusted income to count, in this case, 2 percent. Miscellaneous
deductions aren't allowed if you have to figure your taxes under the
alternative method.
8.
Teachers, go shopping!
Up
to $250 you spend on materials to make the learning experience better for
your pupils is tax deductible. And teachers aren't the only ones eligible
for this bit of a tax break. The educator expenses deduction also can be
claimed by teacher aides, counselors, even principals, as long as they
work at least 900 hours in a public or private school for kids in grades
kindergarten through 12.
9.
Spending accounts
Do
you have a flexible spending account at your job? Does it still have money
in it? Does your benefit year operate on a calendar basis? If you answered
"yes" to all these questions, then you're running out of time to
maximize this valuable fringe benefit.
Flexible
spending accounts allow workers to put away pre-tax cash to help pay
out-of-pocket child or dependent care expenses or uncovered health costs.
Not only can these accounts help you meet extra costs, but the account
contributions are taken out of your paycheck before taxes are
calculated.
These
accounts are particularly beneficial when your medical expenses don't add
up to the percentage-of-income threshold discussed in tip 6. Plus, the IRS
has decided that you can now use the account money to pay for
over-the-counter medications.
10.
Start or add to a company retirement account
Give
yourself a holiday gift of future financial security by starting or adding
to retirement savings accounts. In many cases, you get an immediate tax
break and begin building a nest egg sooner. If you're eligible to
participate in your company's 401(k) retirement plan and its rules allow
you to enroll now, do it. If you're already contributing, think about
upping the amount. The money you contribute reduces your taxable income.
It
may not seem like much for just a couple of pay periods at the end of the
year, but every little bit of money that Uncle Sam doesn't tax is cash in
your pocket. And when the new year rolls around, you've got a head start
on reducing that tax bill, too.
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