As the year winds down now’s the time to think about minimizing the tax bite for 2011.
Boost your retirement accounts
While you have until April 17th to make contributions to your IRA, you only have until the end of the year to boost contributions to your employer-sponsored plan, such as your 401(k) or 403(b) plans. The benefits are twofold: pre-tax contributions to these accounts not only reduce your overall tax bill, but also build up your savings. With just a few more pay periods to go, try to max out – ideally, stashing away a total of $16,500, or $22,000 if you are 50 or older.
It’s been a wild ride on Wall Street this year, so carefully review your portfolio statements to assess your investments’ overall performance. After all, recognizing capital gains and losses before ringing in the New Year, helps minimize your net capital gains tax and maximizes deductible capital losses. Any investments you want to sell? Consider doing it before the end of the year. You can deduct up to $3,000 of losses against ordinary income.
Improve your home
If you haven’t already maxed out your home energy tax credits in previous years, make 2011 the year to do it since the Residential Energy Tax Credit expires at the end of the year! The tax credit is worth 10% of the cost up to $500 for insulation, roofs, skylights, and doors, up to $200 for new windows, and up to $300 for heating and air conditioning systems. Upgrades must be installed by Dec. 31st in order to claim the tax credit. For more specifics, including various restrictions and other details, go to http://www.energystar.gov.
Defer income (until 2012); accelerate deductions (into 2011)
Are you owed any self-employment income? A bonus, perhaps? It may be worth checking whether payments can be delayed until the start of next year.
This strategy not only minimizes taxable income for 2011 (something to think about, particularly if you anticipate being in a lower tax bracket in 2012), but it may also enable you to claim larger tax deductions, credits, and other tax breaks for 2011 that are phased out over various levels of AGI. Specifically, things like child tax credits, higher education tax credits, and the above-the-line deduction for higher education expenses and the tax deduction for student loan interest meet these requirements.
Pay Bills Early
Prepaying some of your bills can also save you money. For example, if you pay your January mortgage in December, you can deduct the January interest payment this year. This gives you 13 months’ worth of tax deductible interest in 2011, thus boosting this year’s total tax savings.
Give the gift of cash
We currently have very generous estate and gift tax exclusions. The gift tax exclusion allows you to give gifts valued up to $13,000 per person per year($26,000 per husband-wife team) to any number of recipients without being taxable. Estate tax applies to the taxable estate at death. An estate tax return may need to be filed, however if the gross estate less allowable deductions is less than $5 million, the decedent is not required to file an estate tax return. While the $5 million lifetime exclusion (which expires at the end of 2012) may only be relevant for the wealthiest Americans, the annual $13,000 gift exclusion disappears forever if you fail to use it by the end of each year. In most cases, the gift isn’t complete until the recipient of a check cashes or deposits it.
Donations to qualified charities, whether made via cash, check, or other monetary gift, need to be substantiated with the proper documentation, as do miscellaneous clothing and household gifts. Donations can add up to hundreds of dollars in tax deductions; to determine your item’s fair market value, use the free online tool “ItsDeductible.” Also, just a reminder: you have to itemize your tax deductions in order to get the break.