The last thing you probably want to think about when holiday cheer is in the air, is your upcoming taxes. However, it can be a great time to implement a few last-minute tax strategies that will maximize your deductions for past year and minimize your upcoming tax bill.
Use these easy to understand last-minute tax strategies to save money each and every year:
1. Delay income
Economics 101 says that when you tax something, you get less of it. As a result, minimizing your income is something that the income tax incentivizes. You can achieve this by deferring or delaying some of your income until the next year, especially if you had a higher than usual income. Plan on receiving income during the first week of January rather than the last week of December. This can pay off big, especially if the bonus or income would bump you into a higher tax bracket this year, but not next.
∙ Do you have clients or 1099 income that you can push to January 1st? If you can delay payment on any invoices, try to do so.
2. Tax credits
Similar to deductions, tax credits take money directly off of your taxes owed. If you’re in the 30% tax bracket, only 30 cents of a deduction goes into your pocket. The full $1.00 of a tax credit goes straight to your bottom line. Do some research to see which credits you might qualify for. You can save a considerable amount of money with tax credits.
∙ Some examples of common tax credits include retirement savings credit, adoption tax credit, credit for the elderly and disabled, child tax credit, dependent care credit, and lifetime learning credit. All of these have specific requirements, so don’t play fast and loose trying to claim credits you don’t deserve.
∙ There are also credits from the Energy Tax Incentives Act. These include credits for solar energy equipment, energy-efficient home improvements, and the purchase of hybrid vehicles.
3. Deductions
Load up on deductible expenses in December to reduce the taxable income for the year. This is especially advantageous if you have self-employment or run your own small business. Ensure that you include only legitimate tax deductions because the IRS will carefully scrutinize every one you take.
∙ If you have predictable income, consider prepaying your taxes for the coming year. This will count as a federal deduction. If you withheld state or local taxes this year and you plan to itemize your deductions, this will very likely benefit you.
∙ Contribute the maximum to your 401(k) and other tax-deferred retirement plans. You’ll increase your savings for retirement while cutting your taxes.
∙ Pay your January mortgage bill early to include the additional mortgage interest. Again, if you don’t itemize your deductions, this won’t help you.
4. Donate to charities
Take advantage of the holiday spirit and embrace the true sense of giving. Donate before January 1st allows you to deduct the contributions this year.
Keep these tips and techniques front of mind as the calendar approaches the end of the year and you prepare to file your taxes, and you will most likely come out further ahead at tax time.
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