It's the most wonderful time of the year — to think about taxes. Several tax breaks expire at the end of the year, so planning now could mean a lower tax bill in 2011.
Christmas carols on the radio say it’s “the most wonderful time of the year,” but it’s also time to think about taxes.
Yes, the filing deadline is four months away, and yes, we still don’t know what will happen with the Bush-era tax cuts, much less the broader economy. But if you plan before the year’s over, you can actually lower your current tax bill despite these unknowns. That should keep you in good cheer through the holidays.
There are a lot of strategies for year-end financial planning, and they’re designed for people with differing incomes and situations. Some people can afford to postpone the dreaded tax season, but as we mentioned in the video above, here’s six things to think about right now to make the new year less taxing:
1. You can take up to a 30 percent tax credit – for a maximum of $1,500 – on certain energy-efficient home improvement purchases. This includes insulation, doors, windows, heating and air conditioning systems, and water heaters. The credit ends with the year, though, so make that purchase before Dec. 31 if you want it to qualify. And if you’ve used this credit before, be careful: The $1,500 is cumulative, not per year. Read more about this tax credit at EnergyStar.gov.
2. Now is the best time to convert a regular IRA to Roth because there’s currently no income limitation – it used to be capped at $100,000 – and you can split the tax bill for converting between 2011 and 2012. This expires on New Year’s Eve, so take advantage if it’s right for you. Check out our story 3 Things You Should Know Before Converting Your IRA to a Roth for help with this decision.
3. Use your flexible spending plan to buy as many over-the-counter medications as you can now, because the healthcare overhaul means no OTC meds through FSAs starting in 2011.
4. It’s the season for giving, and that can help you with taxes, too. When it comes to charitable donations, try to donate appreciated stocks instead of cash – you’ll get a deduction for the current value, not what you originally paid. You get a higher deduction this way, and it’s also more cost-effective than selling the stock, paying taxes on it, and then donating the proceeds.
5. If you want to donate to lower your tax burden, but don’t have a stock certificate or cash, use a credit card. That way, you can take the deduction this year and pay the bill next year.
6. You can also get a write-off by selling losing investments. You can deduct up to $3,000 of losses against current income. Once again, that’s a limited time government offer: It’s only good through Dec. 31, so act now to dump bad investments.
For more tax advice – including why you might want to shift income into this tax year and deductions into next – read our story Even if Bush Cuts are Extended, Taxes are Rising Next Year.