(This is a guest post by Greg Go from Wise Bread)
Even though the year is almost over, it’s not too late to take advantage of tax breaks for the current tax year. You have to act quickly, though. Some of the breaks are contingent upon you completing transactions before the end of the year.
Here are several tax breaks to consider before the year comes to an end.
One of the easiest tax breaks to get, if you itemize your deductions on Schedule A, is the deduction for charitable donations. You can take deductions for money donations that you make, and for goods that you donate to tax-exempt charitable causes. Now is a great time to make extra donations in order help others — while receiving your tax benefit.
No matter how you make your donations, though, you should get a receipt from the organization, even if it is a donation to your church congregation. That’s pretty easy when you donate money, but when you donate items, you need to estimate the market value (which is likely less than what you paid initially) and make sure that the items are in good condition. Ask for a receipt from the charity when you donate goods, as well as when you donate money.
If you have out of pocket business expenses, you can deduct many of them, even if you work for someone else instead of having your own business.
If you pay out of pocket for expenses related to your work, such as a company cell phone or travel, and you aren’t reimbursed by your employer, you can deduct some of your costs, to the extent that they exceed 2% of your Adjusted Gross Income (AGI).
If you have expenses related to a home business, you can deduct those as well, offsetting your other income. So, if you have been thinking of buying a new computer or a new chair for your home office, do that now, before the end of the year, in order to get the deduction.
Retirement Account Contributions
You can boost your retirement account contributions if you haven’t already put in the maximum.
Your 401(k) contributions are tax-deductible (however, Roth 401(k) contributions are not tax-deductible), so adding to your account helps you boost your nest egg and can lower your tax bill. You have until the end of the year to make contributions that reduce your taxable income.
If you have an IRA, you actually have until April 15, 2013 to make contributions. As long as you are clear that you are making a previous year contribution, you have a little extra time. This can be helpful if you need an extra deduction later.
Sell Losing Stocks
You can sell your losing stocks and deduct your losses against your capital gains. On top of that, once you have offset your capital gains, you can apply any excess, up to $3,000, toward reducing other income. Finally, if you still have un-deducted losses, they can be carried forward to other years indefinitely. However, the “sell” transaction has to go through by December 31 if you want to count it on your taxes.
You do need to be careful, though. Make sure that you really want to sell your investments. The wash sale rule stipulates that you wait at least 30 days before buying the same stock back if you want to deduct your losses.
It’s also possible to sell your losing stocks, offset capital gains and/or other income, and then donate the money to charity — and then take that deduction, as well. You can also give appreciated investments to charity and deduct the full market value of the stocks, which means you avoid capital gains taxes, and get a nice charitable deduction, too.
Pre-Pay Some of Your Expenditures
If you have a deductible expense coming up earlier in the New Year, you can pre-pay it now, before the year ends, and take the deduction.
A good example is the interest on your mortgage. If the mortgage payment is due the first part of January, accelerate the timetable so that you make the payment before the end of the year, and you can deduct the mortgage interest on your 2012 tax return.
You can also pre-pay other itemized expenses. Consider bunching any costs that have an AGI threshold now, so that you can hit the limit, instead of waiting until after the first of the New Year. Common costs to consider are:
- medical costs;
- investment expenses;
- job hunt costs.
Move these expenses into the current year, rather than spreading them out. Together, these tactics can help you knock a little bit off your tax bill.
Review Your Eligibility for Credits
Don’t overlook any of the tax credits that might be available to you.
Tally up expenses for childcare, and for tuition and fees for a dependent. Go through what you have spent this past year, and compare it to allowed credits. Credits are especially valuable because they act like gift cards. They reduce your tax bill on a dollar for dollar basis, instead of reducing your income like a deduction does.
Additionally, remember that there are state tax credits for which you might also be eligible. Your state might have programs for renewable energy upgrades to your home, or other credits. When you double-check your eligibility for state income tax credits, you can save on your tax bill a little closer to home.
It’s not too late to save on your tax bill. There are a number of opportunities available to reduce your income (deductions), or reduce your tax bill directly (credits). However, you need to act quickly in order to take advantage of these breaks before the year ends. Look through your finances and see whether there are some last minute changes you can make.
If you have questions about what you are eligible for, call your tax accountant today.
– This is a guest post from Greg Go of Wise Bread, where you can find money saving advice like this list of 7 banks still offering free interest-bearing checking accounts.
Photo by cea