Make the Most of Your 2008 Tax Deductions
It might only be December and you realize that you still have roughly four months before the tax filing deadline, but that doesn’t mean you should ignore thinking about your taxes right now. Instead of thinking about the April 15th tax deadline, you should be thinking of it in terms of having just a few weeks left in which you can reduce your tax bill come April.
As you may know, for most forms of income and deductible expenses, it’s all based on a calendar year. That means December 31st is going to be the last day to make any moves that are required in order to decrease your 2008 taxes. Here are some areas where you can make an impact on your tax situation.
The first way to make an immediate difference on your tax bill is to reduce your taxable income by contributing to a qualified pre-tax retirement plan. This includes a 401(k), 403(b), 457(b), Traditional IRA, or a number of self-employed retirement accounts. While the IRA does allow you time into next year before you file your taxes to make a contribution, when it comes to your employer-sponsored plans, you have to make contributions before the end of the year.
So, if you haven’t yet maxed out your 401(k) at work, you may want to consider increasing your contribution for the remainder of the month. You probably only have one or two paychecks left this year, but a temporary bump in contributions can shave a few hundred dollars in taxes. If you have a traditional IRA and don’t want to worry about making a contribution next year before filing your taxes, go ahead and make it now. Not only will you get it out of the way, but you’ll be buying in at some pretty low relative prices.
While contributions into qualified accounts is a good way to reduce your taxable income, don’t overlook losing investments in taxable brokerage accounts. You can sell off investments at a loss and use the loss to offset gains, or even your regular income. If losses are substantial, you can even carry the losses over into future years.
Donations to Charity
Donations are another item that typically need to be made before the end of the year if you want them to count on your taxes. Whether you regularly donate to charity, or you’re thinking about it for the first time, you may want to consider doing it in the next few weeks if you want to cut down that tax bill.
Keep in mind that you need to keep all of the appropriate documentation and receipts associated with donations. Don’t let that deter you, but be mindful that the IRS won’t like it if you just estimate or fudge some numbers to get a tax break.
Flexible Spending Accounts
Use it or lose it. That’s the name of the game with most flexible spending accounts. While the coverage year can vary, most employers opt for the calendar year. That means if you’ve put money into a FSA and there’s still some left as you approach the end of the year, you want to make sure you’re taking advantage of it. You’ve already received the tax break on these funds, so make sure you’re taking full advantage.
Now is a good time to stock up on qualified over-the-counter expenses. While you may not be sick right now, or you might not need a particular medical device at this time, think about your needs in the coming months and plan those purchases accordingly so that your money doesn’t go to waste.
Extra Mortgage Payment
If you carry a mortgage and are still early in the loan paying a significant amount in interest, you might consider scheduling your January mortgage payment a little early. Especially if your mortgage payment comes due on the 1st of the month, just moving it ahead a day or two could tack that interest payment on to your 2008 taxes.
Of course, this only works if you itemize and take the mortgage deduction, and it also depends on how easy it is to change your payment date. But in this case, just moving the payment a few days earlier could result in a decent deduction. Keep in mind that you’d be one less payment short in 2009 unless you made another regular January payment or did the same thing at the end of next year.
For the Self-Employed
If you have your own business, either part-time or full, now’s the time to stock up on anything you might need. If you hate playing the stiff self-employment tax, you can make a dent in it by making purchases before the end of the year. Whether it’s office supplies, equipment, or even services, if you know you’ll need them going forward, do it now so you can reduce this year’s taxes. As always, keep your receipts and records of all purchases.
These Are Just a Start
The tips above are just a start, and there are a number of ways you can use the last few weeks to reduce your tax liability for 2008. Ideally, it would be nice to space everything out across the year to maximize your cash flow, but if you’re in a situation this year where you think you might be stuck with paying more taxes than you want, you can still take action to minimize that.
And don’t stop there. Instead of waiting until the last minute to make these decisions, use some time now to begin planning for 2009. You should have a better idea of what your income and expenses will look like next year, so you can start now in preparing for those taxes so there isn’t a surprise come the end of next year.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.