3...2...1...HAPPY NEW YEAR!
It's that time of year again. Time to ring in the New Year and make your resolutions. But before the ball drops on December 31st, follow these 3 End of the Year Tricks to Save Money on Taxes!
#1: Donate to your favorite charity
Donating to charity is a great way to save money on your taxes. When you make a donation to a qualified organization, you are eligible for a tax deduction. If you're not sure tha an organization qualifies, use this IRS charity search tool, to look up organizations by name and location. In order to make your donation tax deductible, it has to be made before the end of the year and you must itemize deductions on your tax return.
How Do You Itemize Deductions?
Itemizing is simple and it can save you a ton of money. Each year you are allowed to claim either a standard deduction for your tax filing status or you can list out your deductions on Schedule A of IRS Form 1040.
The standard deduction in 2011 for a single taxpayer is $5,800. If you spent more than $5,800 during the year on certain types of deductible expenses—like charitable donations, mortgage interest, and a portion of your medical care—then you will save money by itemizing.
#2: Contribute the Maximum Ammount towards your Retirement Account at Work
If you have a retirement plan at work (401(k), 403(b), 457, or government Thrift Savings Plan) Find out how much you’ve contributed this year. In 2011, you can contribute up to $16,500 or $22,000 if you’re 50 or older.
Every bit 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.
To do this, contact your benefits administrator at work to increase your final contribution for the year so you can max out the account or get as close as possible.
#3: Prepay as Many Deductible Expenses as You Can
Because you have to itemize to be eligible to claim most of available deductions, prepaying increases the likelihood that you’ll have enough to itemize in the current year.
Here are some deductible expenses you can prepay:
Home Mortgage Interest: Pay your January mortgage payment by December 31 so you have extra interest to deduct for this year.
Property Taxes: Most people 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 maybe even an early-pay discount.
Student Loan Interest: Even if you don't itemize, you are allowed to deduct up to $2,500 of interest paid on a student loan. However this is subject to annual limits on your income. By prepaying your January student loan payment by December 31, you will have a little more tax savings for the current year.
You can find what additional deductible expenses you can prepay by looking at a Schedule A. (medical costs, legal fees, and unreimbursed business expenses, etc)
By taking the time to do a little End of the Year tax planning, you can save a bundle! If you want to make sure you are saving as much as possible, consider meeting witht a tax professional. They review your situation and make sure you are not paying any more tax than absolutely necessary!