Tax time is just around the corner, so now is the perfect time to review the opportunities that you can take advantage of in order to lower your tax bill. Remember, that you have until December to effect any meaningful changes to your taxes that are due April 15, 2010. Once December ends, there is very little that you can do to impact your tax situation.
1. Charity. This one is one of our personal favorites. Why? Because aside of the tax deduction that is helps to lower your year end tax bill, we strongly believe in donating to those organizations whose causes you support. This year especially, because of the economic downturn, many individuals are donating less than ever and many worthy charitable causes are suffering greatly. If you donate cash, clothing, property, household goods to an eligible charity, you will help a worthy cause and get a tax break doing so. This gets a bit tricky with automobile donations. Generally, you are able to deduct a full fair market value of the property you donate. That is NOT the case with vehicles. If the charity sells the vehicle, you are only able to claim the amount for which the vehicle was sold for. However, if the charity uses the vehicle instead of selling it, you can deduct the full market value. And, please remember to SAVE ALL RECEIPTS.
2. Offset Capital Gains. Now is the perfect time to take a good look at your investment portfolio and consider selling some losing stocks to offset the capital gains generated during the year. The losses will offset the gains, therefore reducing your taxable income. In addition, net realized losses that exceed gains can be deducted against ordinary income up to $3,000 per year. For those of you that have been with us for a while, you know our general advice about investments. NEVER base your investment decision solely on the tax ramification. Carefully consider your financial investment decisions with your advisor from all relevant perspectives.
3. Defer Income. While we certainly almost always advocated for deferring income and paying later in the past, this year might be different based on tax increase we will face next year. Depending on your tax bracket, it might make sense to defer some of your compensation until next year. If your company provides year end bonuses, you might want to consider receiving your check right after the new year so that it will be included in your compensation for 2010 instead 2009. For self-employed individuals, consider billing later and therefore receiving payment in the subsequent year. The chance you are taking with this deferral is that taxes might go up significantly next year (judging by all the proposals out there, it is certainly more likely than not). If that is so, it might not make sense to defer.
4. Accelerate Expenses. State and local taxes, property taxes, mortgage payments, etc. have a direct impact on your year end tax bill. Making an extra mortgage payment before the end of the year will help you lower your tax bill. The same goes for business expenses. If you are a cash basis taxpayer, making an extra business expenditure payment this year will result in a lower tax bill.
5. Flexible Spending Accounts. These are a great way to save money because they use pre-tax earnings to pay eligible medical and childcare expenses.
Everyone’s financial situation is unique so it is always advisable to consult your tax professional. We are here to help!