How to Maximize Your Deductions Before The End of the Year
Believe it or not, 2010 is just about over. You know what that means: holidays, family get-togethers, and…tax deductions? It’s true – the end of the year is a perfect time to take stock of your soon-to-be-filed tax return and investigate ways to beef up your write-offs. If you don’t have much to deduct yet, don’t worry: by acting quickly (and intelligently) you can still trim your income tax bill in plenty of time for April 15.
Donate To Charity
One sure way to stack up your tax deductions is by making donations to charity before the year is out. Be warned, however, that not every organization qualifies you to claim a tax deduction. According to the IRS, the organization or entity you donate to must have 501(c)(3) status. This is a tax exempt status given only to organizations deemed by the IRS to be “organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.”
Generally speaking, institutions focused on charity work, education and other non-profit seeking goals can qualify for 501(c)(3) status. Make sure any organization you donate to has it before money changes hands – otherwise, no tax benefits will accrue to you.
Another way to lighten your tax burden on April 15 is by deferring end-of-year income. As you may know, you are only taxed on income earned and reported during the previous calendar year. Yet, you as an individual (or business owner) retain full freedom regarding when income is accepted and received. In other words: let’s say a $5,000 consulting payment is owed to you by a client before the end of the year. If you would rather not pay taxes on this income right away, simply opt not to receive it until after January 1, 2011.
There is nothing illegal, unethical or immoral about it. You are not cheating the IRS – rather, the fact that you are not paying any taxes stems from the fact that you are not receiving any income. Instead, you are consciously choosing to receive that income later, and pay the tax in 2012 instead of 2011.
Increase Appropriate Expenses
If you are self-employed, you can also lower your tax bill by increasing appropriate end-of-year expenses. Note the word “appropriate.” The strategy here is not rushing out to Office Depot and indiscriminately emptying the corporate account on pointless purchases. True, you would lower your tax bill dramatically, but you would have squandered capital for no other benefit.
No – the strategy is nothing more and nothing less than grouping objectively needed purchases at year’s end, when the biggest tax benefits can be gained. Think about supplies or materials you know the company requires and can benefit from. Then, resolve to buy them before December 31, rather than waiting until after the New Year.
Un-reimbursed Medical/Work Expenses
If you are not self-employed, you may still be able to deduct certain expenses on your upcoming return. If you have not yet been reimbursed (or will never be reimbursed) for the any of the following:
- Medical expenses
- Gas mileage or auto repairs
- Work-related hotel stays
- Work-related air travel
These are valid deductions and perfectly legal to take. Just note that such expenses may only be deducted in excess of a certain percentage of your adjusted gross income; that is, you cannot cite $100,000 in un-reimbursed fees and claim that you are now off the hook for paying taxes on your $80,000 salary. However, you are certainly entitled to total up the fees you did accrue and key them into Schedule A on your Form 1040.
Beef Up Retirement Contributions
Anyone (self-employed or not) can boost late year write-offs by plowing more money into tax-deferred retirement accounts. The big exception here is the Roth IRA: instead of writing off contributions today, you get to withdraw the money tax-free in old age (which lets your money grow untaxed over many years.) For most other retirement accounts – like the 401(k) and Traditional IRA – you deduct the amount of contributions made this year on your upcoming tax return.