As the end of the calendar year approaches, you should take some time to focus on your taxes. There are several things that you may be able to do to lower your bill.
1. Review your income, expenses and potential deductions: Before you can make any adjustments, you will need to look closely at how much you are earning, spending, and saving and what you can deduct.
2. Review your portfolio: If capital gains are high, consider taking a loss to offset some of the capital gains income.
3. Defer income: Unless you have reason to believe that next year will bring you a higher income and move you into a higher personal income tax bracket, you may want to defer income until after the first of the year. If you are self-employed, for example, send the last invoices out late in December so you will more likely receive payment in January.
4. Use up your flex spending plan: If you have a flexible spending plan, which means you have put aside tax-free earnings to cover medical and dental expenses through a plan offered by your employer, you need to use it up. Make doctor appointments now and buy necessary medical supplies that are covered in the plan.
5. Pay your January 1st mortgage payment on or before December 31st: This allows you to take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you a 1098 form.
6. Be careful about buying an actively managed mutual fund: The later it gets in the year, the more likely you will pick up the capital gains distributions on a mutual fund you hardly own. Check the distribution schedule and if it’s late in the year, wait before buying the fund.
7. Teachers, take a deduction from your students: You can still take up to a $250 deduction on materials purchased to make the learning experience better for your students. This deduction is also applicable for principals and others who are employed in a school. If you’re not sure if this deduction applies to you, contact the IRS.
8. If you’re self-employed, stock up: This is the time to buy all of the business equipment and supplies you haven’t yet purchased. Make sure to mark and save your receipts.
9. Prepay your state and/or local taxes: If you don’t think your personal income tax bracket will be higher next year, and you’re not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
10. Make charitable donations: If you have extra cash, donate money to charity. Save the receipts and use the charitable donations as deductions on your tax return. These are some of the ways in which you can make appropriate changes to lessen your tax bill.