In the middle of the holiday season we have a lot on our minds, though it usually doesnt include managing tax liabilities. Taking a few well-thought-out steps now can help you manage taxes, save money and avoid expensive mistakes.
Not only do you need to budget funds for expected holiday purchases but also to prepay select bills. This can be an excellent tool to reduce tax liability. As a homeowner, prepaying a mortgage payment increases the amount of interest available for deduction. For example, by making a payment due Jan. 2 on Dec. 29, you can claim accrued interest for December. Be sure that any checks written near the end of the year for this purpose clear before midnight Dec. 31.
For the self-employed, prepaying for business supplies can be another good tax-management tool. Can you justify some of the tech-pad equipment as an investment beyond entertainment level? It might be worthwhile for you to make an investment to bring it up to task (software, increased memory and a keyboard). Remember, equipment must be in your possession at the end of the tax year to benefit from a deduction.
If you itemize deductions, making donations to qualified charities can benefit your tax standing. Be sure to obtain a receipt for these donations. Consider the use of a credit card to help ensure being eligible to deduct these contributions. For noncash donations, keep records on donated items as well as an estimated fair market value to use for the deduction.
Review your stock investments before the end of the year to help year-end tax planning. You might consider donating stocks that have appreciated considerably instead of donating cash. Not only will you get credit for the value of the stock at the time of donation, you wont be liable for associated capital-gains taxes. Holdings that are being held at a loss may be a good tax-management opportunity as well as a good chance to put the money to work in more profitable investments. It is a fine line to avoid holding on to losing stocks and hoping they turn around vs. cutting losses and moving on to better options.
Consider contributing to a retirement account for yourself or a college savings plan for your children. Colorado allows deductions for contributions to 529 college savings plans. If you make less than $169,000 as a couple, each of you can make IRA contributions of $5,000 and an additional $1,000 if you are 50-plus. For a traditional IRA, these contributions are tax-deductible. Roth IRAs are not deductible, but the distributions are tax-free later. The maximum amount one can contribute to a retirement plan this year, including a 401(k) or 403(b), is $16,500 plus an additional $5,500 if you are 50-plus. This base increases by $500 in 2012.
Enter 2012 with an improved plan for retirement and tax management. As always consult your tax adviser for advice specific to your situation. Thanks to John Deering, Colorado State University Extension agent, for some of these suggestions.
email@example.com or 247-4355. Wendy Rice is family and consumer science agent for the La Plata County Extension Office.