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Increasing Tax Deductions
Everyone needs an extra tax deduction or two. Before the year ends, consider these options to help increase your tax deductions:
Property Taxes - Most counties allow you to pay your property tax in two payments, one payment in the current tax year and one payment the following year. Since property tax is deductible, make both payments before year end
Charity - Whether it's cash or goods, donate to non-profit charities before year end. Keep in mind that you will need to get a letter or receipt from each place you donate to that includes the amount and date. Charitable tax deductions vary from year to year so ask your accountant about items you can use as a deduction. For example, you may give a weekly cash gift to your house of worship but you must be able to prove it.
Mortgages and Lines of Credit - If you have a mortgage or line of credit, make an extra payment before year end. The interest is tax deductible and will reflect and increase on your 1098 mortgage or line of credit statement.
Health Care - The Internal Revenue Service allows you to take a deduction for any health care expenses that exceed 7.5% of your adjusted gross income. Keep track of your medical expenses and if you need a little more to exceed that 7.5%, make an extra health insurance premium payment or obtain health care services you've been putting off. Ask your accountant to help you figure out if your health care expenses exceed 7.5% or if you need more to qualify for this deduction.
Business Expenses - If you own a business, buying equipment and even office supplies before year end will give you extra expense deductions. If you're thinking of purchasing a company vehicle, do it before year end.
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- Losing Investments - If you have stock, securities or other investments that are down, consider selling them before year end. These losing dollars will offset any capital gains you may have.
- Retirement Plans - Find out if you can add additional dollars to your retirement plan. This can help reduce your taxable income.
Mutual Fund Investments - Avoid investing in new mutual funds before year end. If a fund does well, you could receive a dividend which will make your adjustable income increase.
FLEX Spending Accounts - If you have a flexible spending account that you can utilize for health care expenses, do so before year end. Dollars in some medical FLEX spending accounts must be used before year end or you lose them. Find out from your personnel department which type of FLEX account you have.
Estate and Gift Taxes - It is best to talk to a tax professional about estate and gift taxes, but if you do give cash in any given year to an individual that falls under the gift tax, make sure the amount is under $12,000.
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Organization Is Key
Throughout the year, keep good records especially if you plan to itemize. If you can, purchase personal finance software like Quicken or Microsoft Money. These programs offer up good reports to help you analyze where you are throughout the year and what you need to do before year end.
Good organization will also decrease the amount of time it takes your accountant to prepare your tax return saving you real dollars. Some items like charitable donations and medical expenses will require you keep receipts in case of an audit so keep these in filed in a safe place.
Finally, keep your financial records for seven years before tossing them or consider scanning documents into a Adobe Acrobat Zip file. Some accountants will scan all of your financial receipts and records for each year and place them on a CD so ask your accountant if they offer this service.
For year end planning to be successful, it's wise to analyze where you are financially throughout the year and keep financial records and receipts organized. Good organization will avoid scrambling for receipts and other records when it's time to file your tax return.
Photo credit: Tax Frustration by Alberto Cueto