Tis the season to be jolly and sing the twelve days of Christmas, well here's William Perez's version of the twelve simple things you can do before the end of the year to keep your income taxes as low as possible.
1. Make an extra mortgage payment. The extra interest you pay will be added to this year's mortgage interest by your lender, boosting your itemized deductions. You may want to confirm with your lender that your payment will be credited as paid in the current year.
2. Pay your property taxes. Real estate taxes are tax deductible. If your property tax bill is due in early 2007, you might want to pay it now and take the deduction.
3. Donate to charity. It pays to be charitable, especially at the end of the year. Donating cash is always a good idea. You can also donate household goods, clothing, and other items. Under the Pension Protection Act, you will need a written receipt for all charitable donations, and donated items must be in good or better condition. You can also deduct the cost of driving for charity at 14 cents per mile. You cannot take a charity deduction, however, for the value of your time or services when volunteering.
4. Pay doctor bills, insurance premiums, buy eyeglasses, or stock up on prescription medications. You can take a deduction for medical expenses exceeding 7.5% of your adjusted gross income.
5. Boost business expenses. Business owners and independent contractors can buy office supplies, invest in new equipment, or pay bonuses to their employees. They should also review their retirement plans or decide about setting up a retirement plan. Many retirement plans need to be established by the end of the year if owners want to make tax-deductible contributions for the year. You will want to review what constitutes a legitimate business expense just to make sure it will be tax-deductible.
6. Organize your financial records. Good record-keeping can really pay off at tax time. Not only will it make your tax preparation easier and faster, but you might uncover enough tax deductions to be able to itemize. More importantly, the IRS will require receipts and other records in the event of an audit. Entrepreneurs should be using accounting software such as Peachtree, QuickBooks, or Microsoft Office Accounting to ensure that all their income and expenses are recorded properly. Individual taxpayers may want to use Microsoft Money or Intuit's Quicken to keep track of their personal spending. As an added bonus, these programs provide reports that summarize your tax deductions for faster tax preparation.
1. Make an extra mortgage payment. The extra interest you pay will be added to this year's mortgage interest by your lender, boosting your itemized deductions. You may want to confirm with your lender that your payment will be credited as paid in the current year.
2. Pay your property taxes. Real estate taxes are tax deductible. If your property tax bill is due in early 2007, you might want to pay it now and take the deduction.
3. Donate to charity. It pays to be charitable, especially at the end of the year. Donating cash is always a good idea. You can also donate household goods, clothing, and other items. Under the Pension Protection Act, you will need a written receipt for all charitable donations, and donated items must be in good or better condition. You can also deduct the cost of driving for charity at 14 cents per mile. You cannot take a charity deduction, however, for the value of your time or services when volunteering.
4. Pay doctor bills, insurance premiums, buy eyeglasses, or stock up on prescription medications. You can take a deduction for medical expenses exceeding 7.5% of your adjusted gross income.
5. Boost business expenses. Business owners and independent contractors can buy office supplies, invest in new equipment, or pay bonuses to their employees. They should also review their retirement plans or decide about setting up a retirement plan. Many retirement plans need to be established by the end of the year if owners want to make tax-deductible contributions for the year. You will want to review what constitutes a legitimate business expense just to make sure it will be tax-deductible.
6. Organize your financial records. Good record-keeping can really pay off at tax time. Not only will it make your tax preparation easier and faster, but you might uncover enough tax deductions to be able to itemize. More importantly, the IRS will require receipts and other records in the event of an audit. Entrepreneurs should be using accounting software such as Peachtree, QuickBooks, or Microsoft Office Accounting to ensure that all their income and expenses are recorded properly. Individual taxpayers may want to use Microsoft Money or Intuit's Quicken to keep track of their personal spending. As an added bonus, these programs provide reports that summarize your tax deductions for faster tax preparation.
7. Sell losing investments to offset capital gains. Investors can lower their capital gains taxes by selling securities that have lost money. Losses offset gains dollar for dollar, and losses in excess of your gains can be deducted, up to $3,000 per year.
8. Wait to invest until after the ex-dividend date. Avoid buying mutual funds held in taxable accounts until after their ex-dividend date. You'll avoid paying capital gains tax on the dividend.
9. Max out your retirement savings. Contributions to a retirement plan reduce your taxable income.
10. Make the most of your Flexible Spending Account. You should use up any funds in your Flexible Spending Accounts, or risk losing that money forever. Use your FSA funds to buy eyeglasses, medications, or get a checkup.
11. Avoid the gift tax by giving $12,000 or less per year per person. Gifts over that amount will reduce your lifetime gift tax exclusion, and gifts over the exclusion will be taxed to the giver. (Giving is a tax strategy used by taxpayers who are facing a potential estate tax bill and need to remove assets from their taxable estate. Taxpayers should be working closely with an experienced tax professional on estate and gift tax issues.)
12. Download preview versions of tax software. Drafting out your tax return can give you a birds-eye view of your tax situation and help you make smart decisions about what to do now to lower your taxes. As an added bonus, starting your tax prep now will mean less time it will take for you to finish up your return next year. TaxACT, TaxCut, and TurboTax have released preview versions of their tax software.
Tax-free gifts for education through Section 529 plans
Maximizing Your Flexible Spending Accounts
Lowering Estate Taxes Through Gifts
8. Wait to invest until after the ex-dividend date. Avoid buying mutual funds held in taxable accounts until after their ex-dividend date. You'll avoid paying capital gains tax on the dividend.
9. Max out your retirement savings. Contributions to a retirement plan reduce your taxable income.
10. Make the most of your Flexible Spending Account. You should use up any funds in your Flexible Spending Accounts, or risk losing that money forever. Use your FSA funds to buy eyeglasses, medications, or get a checkup.
11. Avoid the gift tax by giving $12,000 or less per year per person. Gifts over that amount will reduce your lifetime gift tax exclusion, and gifts over the exclusion will be taxed to the giver. (Giving is a tax strategy used by taxpayers who are facing a potential estate tax bill and need to remove assets from their taxable estate. Taxpayers should be working closely with an experienced tax professional on estate and gift tax issues.)
12. Download preview versions of tax software. Drafting out your tax return can give you a birds-eye view of your tax situation and help you make smart decisions about what to do now to lower your taxes. As an added bonus, starting your tax prep now will mean less time it will take for you to finish up your return next year. TaxACT, TaxCut, and TurboTax have released preview versions of their tax software.
Tax-free gifts for education through Section 529 plans
Maximizing Your Flexible Spending Accounts
Lowering Estate Taxes Through Gifts
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