It’s not too late to cut your 2011 tax bill. Prior to December 31st:
- Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $16,500 into your 401(k) or 403(b) plan. Anyone 50 or older by December 31st can put away an additional $5,500. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
- If you’re self-employed, consider setting up a Solo 401(k) by 12/31. A Solo 401(k) plan lets a self-employed person hit the $49k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $54.5k into a retirement plan for 2011.
- Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.
- Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules.
- Consider selling your investments that have increased in value if you are in the lowest tax bracket since the capital gains rate for you will be 0%, and this rule is slated to expire on 12/31/12. You can then buy back those securities, and the “cost-basis” will be the higher amount. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains don’t push you out of the 15% tax bracket, or you’ll be taxed on those gains that fall outside that bracket.
- Send in your January 2012 mortgage payment early enough so it will be processed prior to 12/31/11. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
- Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction. (To track what you donate, download our Non-Cash Contribution Worksheet – Excel Version or the PDF version, or use the App UDoGood.)
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2012. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.
- Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and not subject to the alternative minimum tax.
- Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.
- Evaluate whether you’ll save any taxes by postponing 2011 income or deductions into 2012 or by accelerating 2012 income or deductions into 2011.
Got questions about year-end tax planning? If so, please contact the closest MDTAXES CPA.