Is it better to get a big tax refund or change your W-4 withholdings and risk a tax bill? Kiplinger has the answer…
Do you look forward to a big tax refund every year, or do you end up paying more in taxes? We’d love to hear from you. Just click the link below and sound off. Remember, your email address will NEVER be published along with your comments.
With Chirstmas coming on fast, taxes are probably not first and foremost in your mind right now, but there are some smart moves you can make between now and the time the big ball drops in Times Square that will make a real difference with it comes time to deal with the IRS next April.
Go to the Doctor
Spend all the money in your health savings and dependent care accounts before the end of the year. If you don’t use the HSA balance, you lose it, and money left in a dependent care account gets added back to your taxable income.
Health savings accounts allow you to avoid federal income tax by earmarking in advance up to $3,050 for singles or $6,150 for families for medical expenses, according to HSA for America. Pre-tax money goes into the account, and interest on it accrues tax-free. Another benefit of medical health savings accounts: portability. Your account goes where you go — which is no small matter in this economy.
Among the many things you can spend HSA money on: dental work, eyeglasses, hearing aids, contact lenses, over-the-counter drugs and visits to the chiropractor. Long-term care premiums can also be paid for from an HSA, up to $260 for those under age 40, $490 if you’re between 41 and 50 years, and up to $2,600 if you’re 61 years or older, according to HSA for America.
Take Income Later, Deductions Now
Postponing income is a smart strategy when your financial situation is changing and you know your tax bracket will be lower next year. So if you’re lucky enough to be getting a bonus this year, consider deferring it until 2012, if your boss is willing. Or, if you own a business, hold off on billing customers until after Dec. 31. And wait to sell any stocks or investments that will hit you with capital gains until the new year.
If you expect to be in a higher bracket next year, figure out if you can pay certain bills early to allow you to claim larger deductions now. Also, consider if items like the child tax credit, higher education tax credit, the above-the-line deduction for higher-education expenses or deductions for student loan interest would be phased out at your higher 2012 income level.
If you make your January 2012 mortgage payment early, you can get the deduction for it in 2011. See if you can pay any property taxes early as well. If necessary, use your credit card to prepay 2012 expenses to capture the expense in 2011.
Don’t Rush to Sell that Losing Investment
At the end of the year, investors who have realized capital gains typically look to sell losing positions to offset them. This year, your thought process may need to be different. If you’re in the 15% tax bracket (up to $69,000 of taxable income for married couples, and up to $34,500 for singles) your long-term capital gains included in that amount are taxed at 0%. So think twice about selling a losing position just for the purpose of offsetting gains. Unless you have a sound investment reason to sell the losing position you will be losing the tax benefit of the capital loss. You can’t reduce a 0% tax bite!
But if you do decide to sell a losing position, be mindful of capital gains distributions from mutual funds. Equity markets have been volatile recently, which may lead to above-average trading activity and larger-than-expected capital gains distributions. Most funds release estimated gains distributions in November or December, which provides ample time for investors to harvest losses, if possible.
Hopefully these tips, along with the other tax tips we provided here last month, will help you come tax time. If you’d like to search more tax information on our site, just look in the “Taxes” Category to the right.
With Thanksgiving just around the corner, taxes are probably not first and foremost in your mind right now, but there are some smart moves you can make between now and the time the big ball drops in Times Square that will make a real difference with it comes time to deal with the IRS next April.
Boost Your 401(k) Contribution – If you have enough in cash savings set aside for emergencies and your monthly budget allows for it, consider upping your 401(k) contribution. You’re allowed to contribute up to $16,500 of your earnings tax free (in addition to any company matching), and that limit gets bumped to $22,000 if you’re over 50. If you don’t have a 401(k) at work, consider setting up an IRA or Roth IRA, recommends Charles Sizemore, editor of the Sizemore Investment Letter. If you’re self-employed and have the cash flow to allow it, you can shelter as much as $49,000 per year in a SEP-IRA.
Give Your Stuff Away – Clean out your closets, garage, attic and spare rooms, and donate clothing and household goods you no longer use to your favorite charity. The IRS allows a deduction for the fair market value of all non-cash contributions that are in good condition. If you’re planning on a larger than normal contribution to your favorite charity, do it before Dec. 31st to lower your taxes this year.
Be sure to get a receipt from the recipient organization and keep it with your tax records. Also, if you’re giving away an item worth more than $5,000, you’ll need a qualified appraisal with your tax return. Know too, that if you offer up your stuff to a for-profit resale store or if you sell it on a consignment basis, and you get a percentage of the sale, the IRS won’t allow that as a deduction.
Give Your Money Away – Each year, you can give up to $13,000 each to an unlimited number of people without any gift tax or estate tax ramifications.
If you choose to give your money to a charity, do your homework. Beware of scammers with names similar to legitimate organizations. A good place to start your research is at one of these websites:
www.give.org
www.charitynavigator.org
www.guidestar.org
A Charitable Loophole Just for Seniors – Seniors can reap tax benefits even without itemizing. A little-known tax planning tip involves charitable contributions for people over 701/2 years old. Many senior citizens have no mortgage interest to pay and don’t have enough deductions to itemize. So typically, they would receive no tax benefit from their charitable contributions.
However, those over 701/2 years old can direct part or all of their required minimum IRA distribution (up to $100,000) directly to a charity tax-free. Even though they aren’t itemizing their deductions, they’ll reap the tax benefit of not reporting the donated distribution as income.
Coming up in December, we’ll bring you a few more tips to help you make filing in 2012 a little less painful.
Think there’s nothing good about paying higher prices at the grocery store and at the pump? Well, as it turns out higher inflation can lead to lower taxes…
Questions or comments about this video? Just click the comment link below. Your email address, although required to post here, will never be published on our site, nor will it be shared with ANY third party.
If you been in a mall or big box store lately, you’re already being reminded that the holiday season is just around the corner. But now is also the time you should start making plans for the end of year tax moves…
Questions or comments? Just use the comment link below to sound off. Your email address will NEVER appear on this site, even though it is required in order to post a comment or question.