With the year coming to an end, here are popular tax reduction tips from the folks at Turbo Tax to consider before you file your taxes. Some have to be implemented before year end, while others can be done before the tax filing deadline.
Contribute to an IRA. Socking money away in an IRA doesn’t just help you at retirement – it can also reduce your tax bill today. The maximum tax-deductible contribution to an Individual Retirement Account (IRA) is $6,000 or, $7,000 if you are age 50 or older. The tax advantaged benefits phase out as your income increases.
If you don’t yet have an IRA in place, it must be opened by December 31 (see options on where you can open an IRA). You can still deduct contributions made right up to the tax filing due date (April 15th or nearest working day), but making them before year-end starts the clock on tax-deferred growth sooner.
Make Your House Energy-Efficient. If you make qualified energy-saving home improvements by the end of the year, you can claim a tax credit of up to 30% of the costs. The improvements must meet federal energy-efficiency standards in order to qualify for the credit. For more information, go to EnergyStar.gov. As long as you pay for the energy efficiency improvements in the applicable tax year, you can claim them in next years tax return.
Review Investment Gains and Losses. Consider selling investment losers to offset any capital gains. When calculating your gains and losses, be sure to include mutual fund distributions; they are taxable gains even when you hold onto the shares. You may want to sell appreciated securities before year-end (or donate them to charity). If you have excess losses, they may be carried forward into future tax years, at a rate of no more than $3,000 each year.
Shift Income From One Year to the Next. If you expect to be in a lower tax bracket next year (e.g unemployed or spouse stops working), and have control over the timing of some income, consider deferring taxes by shifting receipt of the income into the following year. Possibilities include year-end bonuses, capital gains and self-employment income. Review your situation carefully because tax rates could be higher if Congress changes tax rules.
Combine Elective Medical Expenses Into One Year. Because uninsured medical expenses are deductible on federal tax returns only to the extent that they exceed 7.5% of your adjusted gross income (AGI), you stand a better chance of having enough to deduct if you group those expenses into a single year. In adding up your expenses, consider elective dental work, eyeglasses and contact lenses, insurance premiums that you personally pay for, health and long-term-care insurance, weight-loss and stop-smoking programs, and over-the-counter medical supplies such as hearing aid batteries.
Make Charitable Contributions. You can make year-end gifts to charity with cash or with appreciated securities. If you donate appreciated securities (like stocks), you can take a deduction for the current fair market value. If you decide to make gifts in cash, you can simply write a check. Or you can put the amount on a credit card in December, pay the bill when it arrives in January.
Either way, you must submit a letter of acknowledgment from the charity, showing the date of the gift, the amount, and whether you received any tangible benefit in exchange, such as a thank you gift. Donations of used cars may be deducted at fair market value only if the charity uses the vehicle in its tax-exempt work. If the charity sells it, your contribution is limited to the actual proceeds of the sale.
Fund College Expenses for Your Child or Grandchild. Contribute to a 529 college savings plan for your child or grandchild and you may reap some state income tax benefits. You’ll also ensure tax-free withdrawals from the plan to pay for future college costs. In addition, direct payments to an institution for educational or medical purposes are not subject to gift tax limitations.
Establish a Health Savings Account. Taxpayers with high-deductible health plans who are not covered by any other health insurance or enrolled in Medicare may deduct contributions to a health savings account (HSA). HSA distributions are not taxable if you use them to pay for qualified medical expenses including deductibles and co-payments, over-the-counter drugs, long-term care insurance, and health insurance premiums or medical expenses during a time of unemployment. HSAs also provide triple tax savings:
Contributions are tax-deductible, earnings on the account are tax-free, and withdrawals for qualified medical expenses are also tax-free. The account goes with you if you change jobs or move, and unused money in the account may be used in future years.