As the year draws to a close, you are probably trying to figure out how to squeeze another tax deduction or two out of your finances this year (if you aren’t… you should start right now!).
When it comes to year-end tax planning and tax reduction, you have two routes – accelerate your deductions or delay your income. Today, we’ll discuss how to find ways to accelerate your deductions so you can take that deduction this year instead of next.
Here are some of the bills you can pay early to help you with your tax deduction:
This is the the easiest one to do if you have a mortgage and the cash on hand to make it work. Make January’s mortgage payment by the end of December. This works because your mortgage payment in January includes December’s interest payment.
Mortgage payments don’t work the same way as rent payments. Your rent is paid at the beginning of the month, and is meant for that month. Mortgages, however, are paid after you’ve already been in the home for another month. So, if you make your January mortgage payment early, you can deduct that mortgage interest in the current year, rather than having it for a deduction in the upcoming tax year.
However, you should understand that you can’t just pay your mortgage ahead for months and expect a huge interest tax deduction. Paying your February mortgage in December doesn’t qualify you for another deduction.
This is another deduction that only works if you own your home and have the cash to make the payment. Instead of waiting until the February due date to make the 2nd installment of your property tax payment, make it in December.
This will let you take the tax deduction for both installments of your property tax in 2011, rather than next year. This is a great way to reduce your taxable income by a little bit more. If you have your property tax bill, go ahead and pay it now.
Tuition & Fees
At the end of 2011, the tuition deduction (officially called the Tuition and Fees Deduction) is set to expire. You can deduct up to $4,000 for your college tuition. However, this deduction will disappear when we all scream “Happy New Year!” If you can pay for your tuition for the first three months of 2012, in December 2011, you will be able to deduct it since you’re paying for it in 2011.
Charitable contributions are another way to reduce your tax bill. If you anticipate being in a higher tax bracket this year, compared to next year, it might make sense to make a larger contribution to a charitable trust like the Fidelity Charitable Trust. Your contribution is deductible immediately and you can make donation recommendations as to where your contributions will go.
Other Ways to Accelerate
Let’s say you don’t own a home and aren’t in school, are there still ways to accelerate some deductions? There are but they are fewer and harder to find. If you run a business, paying your bills early can be a good way to reap the benefits of a tax deduction. You may not need it until early next year but by purchasing it now, you can claim the deduction a year early.
If you have room to contribute more to your retirement plan, give that a look. Those contributions are tax deductible and is a great way to reduce your burden while saving for retirement. Traditional IRA and 401(k) pension plan contributions are tax deductible, Roth IRA contributions are not.
As always, with any deductions that you claim, make sure that you have the appropriate supporting documentation. If you are unluckily chosen for a tax audit, you will need to have the right records to help you prove that you really are entitled to the deduction. It’s easier to get that organized now, when you aren’t facing an audit, than when the agent is knocking on your door!