Many people put off thinking about taxes until a month or two before the tax deadline, but in reality, the end of the year is a great time to think about your taxes. In fact, what you do at the end of the year can often have a much greater impact than what you do at the beginning of the year. Here are some year-end planning moves to make to save on taxes:
Year End Tax Planning Moves
Contribute to Retirement Savings
It is always a savvy move to make tax-deferred retirement plan contributions. Contribute as much as your employer will match into your Thrift Savings Plan, 401k, or 403b plans. If your contributions have not been enough, speak with your employer about raising your contribution amounts moving forward.
You can also contribute to a Traditional IRA, which offers tax deferrals in the year you make the contribution (and you pay taxes when you make withdrawals at retirement age). Be sure to compare Traditional and Roth IRAs to make sure the Traditional IRA is better than a Roth for your specific situation.
Take Some Investment Losses
When you sell a stock or a mutual fund which you have had for a year or more and you take a loss, you can deduct the loss from your capital gains. Any losses still left can allow for another $3,000 reduction in your regular taxable income provided you do not buy the same security again within a 30 day time period.
Lock in Your Gains
It is predicted that the tax on long-term capital gains will go up next year so now is a good time to sell and pay lower tax rates in 2010. You can then take the cash and buy what you want. When selling at a taxable gain, there are no limits as to when you can re-buy the same security.
Pay attention to your investments
Some investments, such as mutual funds and Exchange Traded funds (ETFs), may have some nasty tax consequences if you buy or sell at the end of the year, due to capital gains and losses. Be sure to read these Financial tax planning tips for more information.
Take Advantage of Deductible Spending
You have no limit when it comes to the itemized deductions you can take for 2010. However, in 2011 it is likely that those who earn more than $100,000 will face limitations. Any charitable contributions you want to make, healthcare costs you can afford to spend, and local taxes that can be paid out before December 31st, you should take the opportunity to do so now since the opportunity may not be there next year.
Make Home Improvements
You can earn up to a 30% tax credit for making your home more energy efficient. You can install new windows, doors, water heaters, and air conditioners and earn up to a $1500 tax credit if the work is done before December 31. You can only earn the credit if you did not use it for last year.
Donations to many charities and non-profit organizations may be tax deductible. The end of the year is a great time to go through your closets and purge unwanted or unnecessary items. You will help someone else, free up space and earn great tax deductions – all great benefits. Be sure to verify your donations will be tax deductible before making the deduction and ensure you get a receipt for your donation. Here is some information to help you determine which charities are legitimate and avoid charity scams.
Customize these tips to your situation. Not all of these tips will work for everyone – remember, each of us has a unique financial and tax situation. Be sure to check with a qualified tax professional or financial planner before making any major financial decisions. In addition, be sure to check with your state for availability of tax deductions or other benefits.