Year-End Tips to Save Money on Taxes
Follow 5 simple strategies now to cut your tax bill.
Laura Adams, MBA
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Year-End Tips to Save Money on Taxes
The end of the year is a busy time with holiday preparations and celebrations. December 31st is also an important deadline for your personal finances because it marks the end of the tax year.
Before you ring in the New Year follow these 5 Quick and Dirty Tips to save money on your taxes:
Tip #1: Make a Charitable Donation
When you make a donation to charity, you may also be eligible for a tax deduction. That’s a winning combination in my book! Consider making a charitable donation as an alternative to giving gifts during the holidays. To make your charitable donation tax deductible, you have to donate cash, write a check, or make a credit card charge to a qualified organization before the end of the year and itemize deductions on your tax return.
How Do You Itemize Deductions?
Itemizing can save you a bundle. Every year you can claim either a standard deduction for your tax filing status or you can list out your deductions on Schedule Aopens PDF file of IRS Form 1040opens PDF file .
For example, the standard deduction for a single taxpayer is $5,800 for 2011. So, if you’re single and spent more than $5,800 during the year on certain types of deductible expenses—like charitable contributions, mortgage interest, and a percentage of your medical care—then you’ll come out ahead by itemizing.
Most people take the easy route and just claim the standard deduction each year. But guess what? Many of them end up paying more tax than they should. So be sure to keep good records of your deductible expenses throughout the year so you can pay as little income tax as possible or get a bigger tax refund.
Tip #2: Max Out a Workplace Retirement Account
If you have a retirement plan at work—like a 401(k), 403(b), 457, or government Thrift Savings Plan—take a look at how much you’ve contributed for the year. For 2011, you can contribute up to $16,500 or $22,000 if you’re age 50 or older. By the way, those amounts have been increased by $500 for 2012.
Every dollar that you contribute to a retirement plan on a pre-tax basis is income that you don’t pay tax on until you take a future withdrawal. Additionally, many employers match a percentage of what you contribute. That’s a smart way to build a nest egg and cut your taxes—and you don’t even need to itemize deductions on your tax return for that benefit.
Log on to your online retirement account, or ask your benefits administrator at work to boost your final contribution for the year so you can max out the account or get as close as possible—especially if you’re expecting a year-end bonus. While you’re making adjustments, go ahead and increase your contribution by at least one percent for next year.
Tip #3: Start a Retirement Plan for Your Small Business
If you’re self-employed, you can open up a retirement plan for your business, like a SEP-IRA, SIMPLE IRA, or a SIMPLE 401(k). Having a retirement plan for your business is a powerful way to sock away more money for the future, get additional tax breaks, and offer your employees an attractive benefit.
Tip #4: Prepay Deductible Expenses
A smart strategy to save money on taxes is to bunch up as many deductions as you can in a single tax year. Remember that you have to itemize to be eligible to claim the lion’s share of available deductions. Prepaying increases the likelihood that you’ll have enough to itemize in the current year. On the other hand, if you won’t have enough to itemize, it’s smart to delay paying as many as possible until next year.
Here are some deductible expenses you can prepay:
- Interest on your home mortgage: Consider paying your January mortgage payment by December 31 so you have an extra chunk of interest to deduct for this year.
- Real estate taxes on your home: You generally receive a property tax bill in November, but it isn’t due until the following year. Paying the tax before the end of the year gives you another deduction, and perhaps an early-pay discount.
- Interest on student loans: You can generally deduct up to $2,500 of interest paid on a student loan. This benefit applies even if you don’t itemize, however it is subject to annual limits on your income. Prepaying your January student loan payment by December 31, gives you a little more tax savings for the current year.
Take a look at Schedule Aopens PDF file and see what additional deductible expenses you can prepay this year, such as medical costs, legal fees, and unreimbursed business expenses, just to name a few.
Tip #5: Spend Money in Your Flexible Savings Arrangement (FSA)
A Flexible Savings Arrangement is a tax-advantaged account that employees can use to pay for certain medical expenses on a pre-tax basis. If you have an FSA at work, it’s a fantastic way to save on healthcare costs. Consider this: If your average tax rate is 25%, you instantly save 25% on your medical expenses when you can pay for them using funds in your FSA because that money is never taxed.
However, there is a deadline to spend the money in an FSA each year or you lose it. The cutoff varies by company, but it’s typically December 31. So put the deadline on your calendar each year to make sure you drain the fund by purchasing qualified products and services—like dental care, eye glasses, and contact lenses—and don’t lose one penny in the account.
Taking the time to do a little year-end tax planning can really pay off. It’s always a good idea to meet with a tax professional who can review your situation and make recommendations so you never pay more tax than you have to.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.