With tax season underway, it is time for taxpayers to start taking some year-end actions with their finances to get the best outcome on their taxes. Thanks to the folks over at Turbo Tax, the leading online tax preparation and submission software, and my own experience here are some of the top tips to ensure you minimize your tax bill or maximize your refund.
1. Sell losing investments – With most investors seeing red across their portfolio’s this year, selling a few loser stocks for a net capital loss is a good way to get a $3,000 (or $1500 for single filers) offset against other sources of gain or income. The one silver lining from all the capital (stock) losses investors have suffered this year, is that they can carry unused capital losses forward for as long as they live. This means you can recoup some of those losses against future capital gains and tax returns. (See more on Capital Gains/Losses tax management)
2. Donate to Charity – Donating clothes, toys, household goods and other items to charity before Dec. 31 may help taxpayers who itemize claim bigger refunds while helping someone else. Using tax return software like Turbo Tax helps taxpayers accurately value donations in accordance with IRS guidelines so there’s no need to guess at an item’s fair market value.
3. Prepay some bills: Taxpayers can prepay a few of their bills due next year in the current year, and get to write them off on this year’s tax return. This includes mortgage payments and predictable medical expenses, like braces for the kids.
4. Maximize your 401k contributions: Increasing contributions to an employer-sponsored retirement plan not only gives taxpayers a boost for the future, it save taxes by lowering their taxable income. And that could help taxpayers take some other deductions based on their taxable income.
5. Recovery Rebates – Some taxpayers who did not qualify for an economic stimulus payment are getting a second chance to claim missing or lower than expected payments.
6. Deduct job search expenses: Taxpayers who are unemployed or just looking to change jobs can deduct their job search expenses. The rules, however, require that their job search be in the same line of work they are currently in. Job search expenses can include travel, lodging, phone calls, resume preparation, and career counseling. These can be deducted even if they don’t get a job offer. However, if this is a first job, no job search expenses are deductible.
7. Tax relief for foreclosures: Recent legislation provides tax relief to people with a home loan that was reduced, restructured or foreclosed. Taxpayers that qualify may not have to pay taxes on the amount of debt that was forgiven by their bank.
8. Open or contribute to an IRA: Qualifying taxpayers have until April 15th to open or make contributions to an IRA or retirement account. Making a deductible contribution before the due date may help lower your tax bill.