We all know that April 15th is the big day. The big tax day that is. But have you been planning for the tax year end? December 31st is the real date you should be anticipating when it comes to tax planning. With a little foresight, you could easily reduce your tax bill when April rolls around. Below are some tax moves you should consider making before New Year’s Day
Defer your income. If your salary is just above the income level for the next-lower tax bracket, you should think about deferring some of your income. You could ask your boss to hold your holiday bonuses until January or you could defer some money into your company retirement plan. Even if you are not anywhere near the top tax bracket, putting money into your 401(k) is a good idea because generally contributions are made before taxes have been deducted and this means you have safe-guarded more of your money from the IRA. You should also hold off on selling assets that will create capital gains until after the new year begins.
Make the most of home-ownership. If you are able to make your January mortgage payment by December 31st, you will be able to deduct the mortgage interest on your coming tax return. The same is true for property tax payments. Another way to save on your taxes through homeownership is by making your home more efficient. Upgrading your windows, adding extra insulation and installing whole home fans are some of the many ways you can do this. You can claim up to $500 for these home improvements as long as they are completed before December 31st.
Group your deductible expenses. There are many ways on Schedule A to reduce your adjusted gross income through itemizing your expenditures. There are, however, thresholds for many deductible categories. For example, medical and dental expenses cannot be deducted unless they are in excess of 10% of your AGI. You should go ahead and start clustering eligible expenses now so that when the year-end comes around you will be able to make the most of them.
Be generous. Charitable gifts can help you reduce your tax bill. Traditional gifts include monetary donations, household goods, and clothing but there are some less usual ways to give as well. Some charities take vehicles, or donated stock and mutual funds. Review your assets and decide what you would like to keep to reach your financial goals, then donate the excess to charity.
Pay college costs early. If you are able to pay on your own for your child’s tuition, fees, and course material before December 31st, you can claim the American Opportunity Tax Credit on your tax return. It is worth up to $2,500 and you could get as much as $1,000 back as a tax refund even if you don’t owe any taxes. It includes education expenses made during the current tax year as well and expenses paid toward classes that will begin within the first 3 months of the next year.
Finally, adjust your withholding. Ideally you want the amount deducted from your paychecks throughout the year to be as close as possible to the amount of your final tax bill. If you usually recive a large refund, or end up writing a huge check during tax season then you should consider adjusting your payroll withholding to correct the imbalance.