If you're like most people, you aren't looking forward to tax time. Most of us would rather think about more pleasant topics, like the upcoming holiday season, instead of contemplating paperwork, receipts and IRS forms.
But there is a way you can make tax time less painful. You can take positive steps now to make sure you pay exactly what you owe ? and no more ? later. Here are some year-end tax tips that may help.
- Make your January mortgage payment in December. If you're a homeowner, you know how much interest payments can offset your tax bill. You can deduct the interest paid during the previous year from your taxes ? even if the payment isn't technically due until the following year. By paying your January bill in December, you'll have a larger amount to deduct.
- Maximize your 401(k) contributions. Do you participate in an employer-sponsored 401(k) retirement savings plan? The plans are a great way to reduce your tax bill and build a secure financial future. Since contributions are tax-free until withdrawn, you can save even more if you contribute the maximum amount. If you aren't contributing all you can, perhaps now is the time to start.
- Balance your investment portfolio. If you will be paying taxes for capital gains in the coming year, it may be a good idea to sell off some stocks that aren't performing well. Of course, you should evaluate your stocks carefully, and it's not a good idea to sell just to create a loss. But if you have underperforming stocks that you plan to unload eventually, consider doing so before the end of the year. That way, your tax liability for your gains will be offset by the loss.
- Take your year-end bonus in January. Do you receive a bonus from your employer at the end of the year? If your company plans to offer you a year-end bonus, ask if you can receive it in January. That way, you'll have less income to report when tax time rolls around.
- Donate to your favorite charity. You can help others and yourself during the holiday season by making a charitable contribution. You don't have to contribute cash to realize tax savings; you can contribute food or clothing to a shelter, for example, and deduct the value of the items. Always remember to keep documentation (a receipt, for example), and make sure the organization you are contributing to is eligible to receive tax-deductible contributions.
- If you're self-employed, make business purchases before the end of the year. If you work for yourself, you can deduct eligible business expenses, such as office equipment. If you need equipment for your business, now is a good time to buy it since it will lower your tax liability. Remember to keep evidence of your purchases.
Will these year-end tax tips help you? Every taxpayer has individual circumstances, so there is no one-size-fits-all solution. However, it pays to review your options and take whatever steps you can to lower your tax liability. It can lighten your load when tax time comes next April.