With the year winding down, we can expect that it will not be known as one of the most prosperous years for our economy. However, that does not mean that we have to forfeit all hope when it comes to our tax bills. Ultimately, there are some great steps you can take to minimize your yearly tax bill.
First, determine if there are certain tax credits that you can use. According to Elaine B. Morgillo in an article she wrote for SeaCoast.com, tax credits are more valuable than tax deductions, because they reduce your income tax liability dollar for dollar. If you are in the market for a new home, you may qualify for a tax credit of up to $8,000. Taxpayers with income below $75,000 (single) or $150,000 (joint) may receive this credit for the purchase of a new home - if they have not owned a home in the past three years. If you are in need of home improvements, you can receive tax credits for installing Energy Star-friendly windows, doors, and skylights.
And there is more. According to tax and accounting giants Thomson Reuters, if you have purchased a new car, including a light truck, SUV, motorcycle or motor home, you can deduct state and local sales taxes paid on up to $49,500 on the purchase price. You just have to make the purchase by December 31, 2009. The tax break phases out in for income is $125,000 for single filers or $250,000 for joint filers. Also, you cannot take the deduction next April if you decide to deduct state and local sales taxes instead of state and local income taxes.
You can donate to charity. Thomson Reuters writes that if you are 70 ½ or older, you can put up to $100,000 per year from your IRA into a qualified charity without paying any tax on the distribution. (This must be done before the end of 2009.)You can also deduct the full market value of most property you donate. However, if you donate a car, the deduction you are allowed is limited only to the amount the charity receives once they sell the car.
Do you own a small business? Small businesses can write off for capital expenditures to $250,000. Further, businesses can recover the costs of some capital expenditures by "immediately writing off 50% of the cost of many types of depreciable property acquired in 2009 for use in the U.S." according to Thomson Reuters.
If you are closer to a lower income bracket, you might want to consider deferring your end of the year payments. Self-employed? Don't bill until the New Year. Therefore, you will be responsible for the payments in 2010. If you are going to cash out savings bonds, wait to do so until after January 1. Lucky enough to get a year-end bonus? Ask for the check to be issued in 2010. This will delay the tax payment for another year.
You can offset your capital gains by selling some of your lower-performing stocks. Net losses can be deducted in full against other income up to a $3,000 annual maximum write-off. Consider putting in the maximum to retirement accounts. Do you have a 401k? If so, contribute the enough to get the maximum from your company. Doing anything less is essentially throwing away free money. Do the same for your IRA - traditional and Roth. You can make contributes for 2009 all the way through April 15, 2010. But know that if you defer payments, it is just less time to for your money to grow.
Finally, if your company offers you a flexible spending account, use them up before the end of the year. This way, you can take tax-free money to pay off medical or child care expense. You can also set up an account to pay for child care while you work or attend school.