Basic Tax Reduction Strategies
You should consider implementing all of these you can before the end of the year to keep your income taxes as low as possible.
Increasing Your Tax Deductible Expenses:
This is always one to the best ways to lower tax liabilities. The lower you taxable income the less tax you pay. You may end up in a lower tax bracket further lowering taxes.
Make an Extra Mortgage Payment:
The extra interest you pay will be added to this year's mortgage interest by your lender, boosting your itemized deductions. You may want to confirm with your lender that your payment will be credited as paid in the current year.
Pay Property Taxes Early:
Real estate taxes are tax deductible. If your property tax bill is due early next year, you might want to pay it now and take the deduction.
Donate to Charity:
It pays to be charitable, especially at the end of the year. Donating cash is always a good idea. You can also donate household goods, clothing, and other items. Under the Pension Protection Act, you will need a written receipt for all charitable donations, and donated items must be in good or better condition. You can also deduct the cost of driving for charity at 14 cents per mile. You cannot take a charity deduction, however, for the value of your time or services when volunteering.
Make Early Payments on Some Items:
Pay doctor bills, insurance premiums, buy eyeglasses, or stock up on prescription medications. You can take a deduction for medical expenses exceeding 7.5% of your adjusted gross income.
Boost Your Business Expenses:
You will want to review what constitutes a legitimate business expense just to make sure it will be tax-deductible. Business owners and independent contractors can buy office supplies, invest in new equipment, or pay bonuses to their employees. You should also review your retirement plans or setting one up if you don't have one. Many retirement plans need to be established by the end of the year if owners want to make tax-deductible contributions for the year.
Organize Financial Records and Information:
Good record keeping will pay off big time in reduced income and business expense allocation. It makes your tax preparation easier, faster and often you will uncover enough tax deductions to itemize. More importantly, the IRS will require receipts, other proof of expenses and records if you are audited. With good records that back up all expenses they generally do not come back to audit additional years. Business owners should use accounting software such as Peachtree or QuickBooks to ensure that all your income and expenses are recorded properly. Individual taxpayers may want to use Quicken or Microsoft Money track of personal spending. As an added bonus, these programs provide reports that summarize your tax deductions for faster, easier, cheaper and more accurate tax preparation.
Review New Tax Credits and Deductions:
There are always new tax credits and deductions, talk to your accountant. People who purchased a new car or truck can write off sales tax even if they do not itemize as part of the new vehicle sales tax deduction. Homebuyers should see if they qualify for the $8,000 tax credit for first-time homebuyers. Homeowners should also determine if it would be advantageous to take the additional standard deduction for property tax in lieu of itemizing.
Multiple Job or Income Streams:
Individuals who have several jobs and/or Social Security recipients who working should review their eligibility for the Making Work Pay tax credit. This credit was new in 2009 and made available to all workers through reduced withholding on paychecks. People occasionally end up being slightly under-withheld if they worked at two or more jobs simultaneously.
Managing Your Investments:
Sell losing investments to offset capital gains. On January 1, 2010, capital gains tax will increase a whopping 25% that definitely makes getting out of poorly performing stocks a good idea. Investors can also lower their capital gains taxes by selling securities that have lost money. Losses offset gains dollar for dollar, and losses in excess of your gains can be deducted, up to $3,000 per year. Investors with significant capital losses might want to reverse this strategy and sell off capital gains as a way to use up their losses.
Avoid Capital Gains:
We have an excellent strategy for capital gains tax reduction. Call 866-328-5772 for details.
If buying stocks wait to invest until after the ex-dividend date. Avoid buying mutual funds held in taxable accounts until after their ex-dividend date. This way you'll avoid paying capital gains tax on the dividend. Conversely, investors with significant losses might not need to worry about buying into capital gains distributions, as they could be utilized to use up losses.
Dividend Pain:
Dividends taxes are scheduled to quadruple on January 1, 2010. That is a big tax increase even for Congress. The current dividend tax of 10% is jumping to 39.6%. If you are living off dividends, this amounts to a 33% cut in your income. It may be a good time to get rid of the dead weight in the market. Even better sell all your stocks; almost any investment has out-performed the stock market over the last 12 years.
Max out your retirement savings. Make the total allowable contribution to a retirement savings plan. If you don't have a plan, get one.
Max out your retirement savings. Make the total allowable contribution to a retirement savings plan. If you don't have a plan, get one.
Tax Strategies Beyond Form 1040:
Make the most of your Flexible Spending Account. You should use up any funds in your Flexible Spending Accounts, or risk losing that money forever. Use your FSA funds to buy eyeglasses, medications, or get a checkup.
Gift Taxes:
Avoid the gift tax by giving $13,000 or less per year per person. Gifts over that amount will reduce your lifetime gift tax exclusion, and gifts over the exclusion will be taxed to the giver. (Giving is a tax strategy used by taxpayers who are facing a potential estate tax bill and need to remove assets from their taxable estate. Taxpayers should be working closely with an experienced tax professional on estate and gift tax issues.)
Estimate Your Taxes:
Download preview versions of tax software. Complete an estimated tax return, which will give you a general idea on your tax situation. This will help you make smart decisions about what to do now to lower your taxes. Additionally, starting your tax preparation now will reduce the time it will take for you to finish your return at year's end. TurboTax, TaxACT and TaxCut typically release preview editions of the software in time for you to make year-end financial decisions.