Ten Tax Moves to Make Before the End of the Year
The year is winding down, and before long you'll find yourself caught up in holiday festivities. But before you start having too much fun, take some time to evaluate your tax situation for 2011.
No, dealing with your taxes is not as much fun as, well, just about anything else. It can, however, be more lucrative.
You can do several things in the final days of the year to reduce what you might owe the Internal Revenue Service when you file your tax return next year.
So, in between all those seasonal events, pencil in some year-end tax-planning time. We'll even get you started. The following slides offer 10 tax moves to make by Dec. 31.
You'll be glad you did. The tax savings could be the best gift you get this year.
Harvest Capital Losses
The one good thing about 2011's volatile stock market is that it might offer some tax savings. If you cashed in on some profitable holdings, sell assets that didn't do as well by the end of the year and use those losses to offset your capital gains.
If you have more losses than gains, you're not alone. But you also can deduct up to $3,000 in losses against ordinary income. If you have more than $3,000 in losses, you're probably not alone here either. Save the paperwork on that excess loss amount. You can carry it forward and deduct it in future tax years.
And don't forget to check your prior year's tax material to make sure you don't have any older losses to carry forward on your 2011 return, says David Fleisher, president of Firstrust Financial Resources in Philadelphia.
Now is also a good time to make sure you have updated the cost basis on your nonretirement holdings, says Fleisher. When you do sell the assets, you'll need the correct basis to determine whether you have a loss or taxable gain.
Pay Tax-Deductible Home Expenses
Make room in your holiday budget for some year-end payments that could cut your tax bill.
Pay your January mortgage by Dec. 31 to get an added interest deduction this tax year. Don't worry about restrictions on prepaid interest. Your Jan. 1 house payment covers December occupancy, meaning the interest for that month is fully deductible if you itemize.
Another home-related payment to make early is your property tax bill. Real estate tax bills issued in the fall typically aren't due until the following year. County tax collectors, however, will gladly accept payment sooner. By paying before the end of the year, itemizers can deduct this amount, too.
And if you pay estimated taxes to your state tax collector, pay your fourth-quarter installment by the end of the year, says Bob Meighan, a CPA and TurboTax vice president. This will increase the amount of state income taxes you can deduct on Schedule A.
Remember, though, if you owe the alternative minimum tax, or AMT, then your state and local income tax and property tax deductions won't do you any good. They aren't allowed under this parallel tax system. Your mortgage interest deduction also could be limited by the AMT.
Bunch Deductible Expenses
Itemizing taxpayers can boost miscellaneous deductions by bunching payments in a single tax year.
Popular write-offs in this Schedule A category include unreimbursed business expenses such as professional journal subscriptions, work-related classes, legal fees and licenses, and job-required uniforms that you bought.
But you can only claim eligible expenses that exceed 2% of your adjusted gross income. To clear that deduction hurdle, make as many of these expenditures as possible by the end of the year.
If your budget is tight, you can pay them by Dec. 31 using a credit card. Allowable business expenses can be deducted in the tax year they are charged.
Of course, if you prepay these expenses this year, then you'll likely come up short in the miscellaneous deductions area the next tax year. So run some rough numbers to make sure it's worth accelerating these expenses now.
And note that the alternative minimum tax comes into play here, too. Miscellaneous itemized deductions aren't allowed at all under the AMT.
Give to Charity
You must itemize to deduct charitable donations, but for most taxpayers, there's no limit to worry about. You must, however, donate by the tax year's end.
You can donate cash, write a check or charge the gift on a credit card. As long as you do so by Dec. 31, they're deductible on that year's tax return.
The same time frame applies to gifts of clothing, household goods or other less-common donations, such as appreciated assets.
And older donors have a special option. If you're 70½ or older, you can roll a required minimum distribution from a traditional IRA or other tax-deferred retirement plan directly to a qualified charity. This allows you to satisfy the distribution rules, but since you don't take the money, you won't owe taxes on it.
This tax break is especially advantageous to seniors who don't itemize, says Mark Luscombe, a tax attorney, CPA and principal federal tax analyst with CCH tax publishing and software company in Riverwoods, Ill.
If you're old enough, consider taking advantage of the rollover option this year. It's set to expire at the end of 2011
Buy a Car?
If you claim state sales taxes as an itemized deduction, you probably use the tables created by the Internal Revenue Service to find the amount to enter on Schedule A. There's a table for the 45 states and the District of Columbia that collect sales taxes, along with information to figure the local tax amount you may add to that total.
These tables are handy. The IRS also offers an online calculator, as do tax software programs. But don't shortchange yourself.
If you made a major purchase during the year, such as a car, boat, airplane, RV, off-road vehicle or even a mobile or prefabricated home, you can add the sales taxes paid on those items to the amount shown in the IRS tables.
If you are planning such a purchase, you might want to make it by Dec. 31 instead of putting it off into next year. The state sales tax itemized deduction is set to expire at the end of 2011.
Given budget concerns on Capitol Hill, it's possible that 2011 could be the last tax year this deduction is around.
Teachers, Buy School Supplies
Many school districts cut budgets this year. Dedicated teachers, however, didn't let that stop them from doing their jobs. Many spent their own money to buy school supplies.
Uncle Sam thanks you for your commitment to education through a $250 deduction of your out-of-pocket classroom expenses. If you're married to a teacher or other IRS-eligible educator and you file a joint return, you each can deduct up to $250 per year for your separate expenses.
While the deduction amount might not cover all your added classroom costs, the good thing about this tax break is you don't have to itemize to claim it. It's one of the above-the-line deductions claimed directly on the long Form 1040 as well as on the slightly shorter Form 1040A.
So make your school shopping list, educators, and buy the material by Dec. 31. This tax break is scheduled to expire after that day.
Make Home Energy improvements
Winter has already arrived in some parts of the United States, making it very obvious to homeowners whose houses are not very energy-efficient.
If you make some repairs or upgrades to your residence, such as adding more insulation to the attic, replacing leaking windows with energy-efficient ones or even buying a new furnace, you might be able to claim a tax credit on your tax return.
Qualifying improvements to your principal residence must be made by Dec. 31. And the tax credit is only a third of what it was in previous years. The maximum amount for 2011 taxes is now $500.
Still, any tax break is a good tax break. So check out your house's energy deficiencies and get to work. 2011 is the last year for which this tax credit is available.
If, however, you decide to make major energy-efficient upgrades, such as solar or geothermal heating systems or wind energy options, you can claim a more generous tax credit for these more expensive improvements.
Add Adoption Expenses
Children can be a real tax blessing. And if your family grew thanks to an adoption, you can be extra thankful for the enhanced adoption tax benefits available for the 2011 tax year.
A provision in the health care reform law expanded the adoption expense amount that can be claimed as a tax credit. It also increased the amount that can be excluded from your income if your employer helps pay for the adoption expenses.
The current adoption credit is worth a maximum of $13,360 per eligible child.
Even better, the credit claim now is refundable. That means if you don't owe any tax, the credit amount can be used to get you a refund from the IRS. Any prior year adoption credit that was not refundable then and that you carried forward to 2011 can also be paid back to you as a refund.
The refundable component, however, is available only for the 2011 tax year unless Congress extends it.
And when 2012 rolls in, the maximum credit and income exclusion amounts also will be reduced, again unless lawmakers decide to extend the current law.
Boost Retirement Savings
The best gift you can give yourself this coming holiday season is adding to your retirement savings. Not only will it help ensure you can enjoy your post-work years, retirement plan contributions could cut your current tax bill.
Money placed in a traditional IRA, for example, could provide a deduction on your upcoming tax return.
Increased contributions to your workplace 401(k) plan through the rest of the year will reduce your taxable income amount since the contributions are automatically taken out of your pay before payroll and income taxes are calculated.
Be sure to take full advantage of your employer's matching contribution amount. That's free money that can really add up.
And even if there's no immediate tax savings because you're not eligible for a traditional IRA deduction or you have a Roth IRA, contributing now is still a good idea. The sooner you add money to your retirement accounts, the longer the earnings can compound.
Claim Your Disaster Losses
2011 is shaping up to be one of the most disastrous weather years on record.
Hundreds of tornadoes raked the United States in the spring. Hurricane Irene climbed the Eastern Seaboard, bringing wind damage and devastating floods all the way into New England. Wildfires raged across much of the Southwest. And the surprise October snowstorm was a double whammy for folks in the Northeast.
If you sustained damage from these or any other storms or unexpected catastrophes, you might be eligible for some tax relief.
In cases of major disasters, you can amend your prior year's tax return if that will provide more tax benefits than claiming the losses in the year in which the disaster occurred. This often is a good option for disaster victims who suffered heavy losses and who previously claimed the standard deduction.
If, however, you didn't amend your previous year's tax return to claim storm losses, gather your storm damage records and examine whether claiming them on your 2011 return will save you tax money.