As you get ready for the holidays, the New Year and many football games, the last thing most of us will be thinking about is planning for their income taxes for 2011 and 2012. Yet finding some time to be proactive with your taxes this time of year can really provide huge financial benefits in some situations.
Here are some tax planning tips you should consider prior to December 31 to help lower your 2011 tax bill and get you on the right foot for 2012:
1. If you became eligible to use a health savings account for 2011 on December 1, 2011 you are deemed eligible for the entire year. By making a contribution into the health savings account you may take a deductible above-the-line contribution for 2011.
2. Make charitable contributions before the end of the year. Keep accurate records as a bank record or receipt is needed for all cash donations. For all cash donations in excess of $250 the charitable organization is required to provide you written confirmation of the donation. If you make an online contribution by using your credit card or make a charitable donation with your credit card you may deduct the contribution for 2011 even though you have not paid the credit card bill.
3. Another way to take advantage of charitable contributions for tax purposes is to donate clothing, automobiles or other non-cash items to charitable organizations before year-end. When you do this, you can deduct the fair market value of the item on your 2011 taxes.
4. Accelerate your itemized expenses before year end. Make payments on your medical bills, car license plate fees, property taxes, and estimated income tax payments now so you may deduct those expenses on your 2011 income tax return.
5. The ability to deduct sales taxes rather than state and local income taxes expires at the end of 2011. Therefore, if you plan to purchase a big ticket item you may want to do it before the end of the year so you may deduct it.
6. After 2011, the $4,000 above-the –line deduction for qualified higher education expenses will not be available, unless Congress extends the tax benefit. Therefore, you may want to pay qualified higher education expenses before the end of the year if doing so will increase the deduction.
7. Energy tax credits for home improvements may result in up to a $500 credit. The credit has a lifetime maximum of $500 per taxpayer, so you may not qualify for the credit in 2011 if you used the credit in prior years.
8. Manage your investments wisely. Before purchasing mutual funds at this time of the year, you may want to delay purchasing the mutual funds until 2012 to avoid dividends. In addition, you may want to recognize losses on your investments. You can sell the investment, then purchase shares in a similar investment position, but not the very same investment. If you want to purchase the same investment that was sold at a loss you must wait 31 days to repurchase the same investment asset.
9. Review your income tax withholding. If you will be receiving a large refund you will need to reduce your income tax withholding. If you under withheld, ask your employer to increase your income tax withholding before the end of the year. Income tax withheld by an employer is treated as withheld evenly throughout the year. In comparison, if you make estimated quarterly payments the payment is treated for that specific quarter. If estimated tax payments are not paid on a timely basis, penalties may result.
Even as a CPA, I don’t love thinking about tax planning any more than most people. But I hate giving the IRS more than I should, so spending a few hours to make sure I take advantage of the ways I can lower my taxes is like giving me a gift for the Holidays.