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Ten Easy Year-End Tax Tips

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Year-End Tax TipsHave you thought about your taxes lately? Probably not, but this month is probably one of the most important months in tax planning because it’s the last time you’ll have an opportunity to effect any meaningful change to your taxes next year. Once December ends, 2008 is essentially frozen and your taxes will be what your taxes will be. So, what sorts of tax moves should you consider making?

Sell your stock losers. Any losses you realize from the stock market, that aren’t offset by gains, can be deducted from your regular income, up to a limit of $3,000 a year. If you’ve been thinking about dumping some losers, now’s the time to do it. If you have more than $3,000 in losses, you can carry those forward indefinitely (until death). More advanced traders may also consider tax loss harvesting as an option as well.

Donate to your favorite charities. Times may be tough but they’re even tougher for charities and philanthropies, who rely on generous contributions to stay in operation. Consider donating money, goods, clothes, your car, anything – to one of your favorite charities so that they can stay operating through these difficult economic times. If you itemize your deductions, you can deduct contributions from your regular income.

Delay bonuses and income. If you can swing it, try to push any additional payments until the new year. If you are paid this year, you have to pay taxes on it in a few months. If you are paid next year, you won’t have to pay taxes on it for an extra year. If your employer withholds taxes on your bonus payments, this is a less valuable strategy. :)

Prepay state and local taxes. This one is a little tricky, if you don’t think you’ll be subject to the AMT, consider prepaying your state and local taxes. State and local taxes are federal tax deductions so prepaying them today means you can deduct them today as well.

Accelerate other deductible expenses. If you have a mortgage, consider paying next month’s payment this month. If you pay it this month, you can deduct the interest payment against this year’s income. If you pay for it on January 1st, it’ll have to wait until you file 2009 taxes. This is true of any deductible expenses you may have from student loan debt to medical to your real estate taxes. If you want, you can make the payment with a credit card and then pay off the credit card next month and still have it be deductible for 2008.

Use up your $12,000 gift exclusion. Each year, you are allowed to give $12,000 to someone else tax-free. If you give more than $12,000, then you are subject to what is known as the gift tax. It’s a little backward but it’s a page out of the estate planning book since heirs to an estate are often taxed on that estate. Anyway, if you were planning on giving someone a very generous gift, don’t forget to to do it. Next year the limit rises to $13,000 so you can give $25,000 to someone within a week and avoid the gift tax ($12,000 on December 31st, $13,000 on January 1st). If you are married, you could give someone $50,000 ($25,000 from each spouse).

Beware buying into mutual funds with capital gains distributions. Mutual funds buy and sell stuff all year, then distribute a bit of that at the end of the year. What you won’t want to do is buy into a mutual fund that is set to make a year-end capital gains distribution because you’ll be immediately taxed on that distribution. Imagine a mutual fund that costs $100 a share. You buy it and the next day it makes a $1 per share distribution, lowering the cost per share to $99. You just bought the thing and already are on the hook for $1 per share in taxes. Boo!

Contribute to your retirement. If you aren’t maxed out on your 401(k), or similar, plan, consider doing it because each dollar contributed is entirely deductible. The 2008 contribution limit for your 401(k) is $15,500 ($20,500 if you’re 50 or greater). Another good idea is to contribute towards your IRAs but you have until April 15th to accomplish that.

Get married. Your tax filing status is based on your status as of December 31st, 11:59 PM. If you were married on December 31st, you’re considered married for the year. If that helps your tax situation, you might want to consider it. :)

Get everything ready. If you’re due a refund, try to get all your ducks in a row as soon as possible so the government will mail you your refund check ASAP. All you’re really waiting for is the official W-2 from your employer, which they are required to mail out by January 31st, and you should be ready to hit the e-file button.

(Photo: thetruthabout)

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9 Responses to “Ten Easy Year-End Tax Tips”

  1. Jim: Some folks need to think twice about delaying bonuses and income. The upper tax brackets are probably going higher next year so taxpayers in those upper brackets might be better off taking the income this year.

  2. David says:

    If self-employed, open up a SEP or Solo401K to put some of your income away so you can reduce your tax burden. But remember, they have to be opened by Dec 31, even if not funded yet.

  3. Miss M says:

    I should point out the marriage tip to my other half! We’d have a tax benefit for being married because we have wildly different incomes, this year I’ll probably make 5 times what he earned. I need to get the donation pile together, we have a lot of clutter I’d like to give away. All good stuff, just no space.

  4. Ben says:

    For the gift tax you could give from one couple to another couple a total of $100,000 ($48,000 Dec. 31 from couple to couple + $52,000 Jan. 1 from couple to couple).

  5. SK says:

    Can anyone let me know how the gift thingy works. I asked my CPA and he said you can not deduct gifts. Is there a different method of reporting gifts and what are the records to be kept in case of audit.

  6. jim says:

    @SK: You can’t deduct gifts, you could never deduct gifts (businesses can deduct gifts up to $25 per recipient per year, but that probably isn’t what you’re talking about).

  7. SK says:

    Thanks for your prompt response. I was talking about: Use up your $12,000 gift exclusion. Can you please elaborate on this. What did you mean by exclusion. THNX

  8. MoneyNing says:

    Jim, I took the marriage advice to heart! (Actually, maybe that was your tip from last year) since I got married this year :) Great tips!

  9. kelly kraut says:

    what is better for filing, single or married? Which one will you get more or a tx break?


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