We still have some time before income taxes need to be filed, but when the clock strikes midnight on Dec. 31, it will be too late to make these tax moves that just might save you some money.
1. Clean out your closet
Got stuff? Spending your holiday vacation cleaning may not be fun but it can be profitable. Donating those old clothes (if you are itemizing deductions) can give you a last-minute boost. Be sure the items are in at least good condition, make a list and get a receipt. It will be up to you to value your items; both the Salvation Army and Goodwill have guides on their websites.
2. Donate from your IRA
If you plan to make cash contributions to your favorite charity in the near future and are over 70 ½ years of age, consider making your donation directly from your IRA. While it’s true you could take the IRA distribution, donate the money, and take an equivalent tax deduction, sometimes it doesn’t quite work out that way. You could end up on the short end of the equation if the withdrawal causes more of your Social Security income to be taxed, or reduces your medical deduction because your adjusted gross income is higher. And you may not have enough deductions to itemize anyway; then the deduction is lost completely. Donating directly bypasses all those unintended consequences. It may even satisfy your required minimum distribution. But hurry — this tax benefit expires at the end of 2013.
3. Button up your home
Earlier this year Congress extended the credit for qualified energy-efficient improvements to your home, but only through the end of 2013. You may be qualified to receive a credit of 10% of the cost of certain upgrades, like insulation, energy efficient water heaters, doors and windows; there is a lifetime maximum of $500 ($200 for windows). There is also a larger credit of 30% available through 2016 for alternative energy improvements such as qualified solar equipment and wind turbines, with no limit.
4. Stock up your classroom
Another deduction due for extinction at the end of the year is the educator expense deduction. Public and private school K-12 teachers may deduct up to $250 of expenses for classroom supplies and materials on the front page of their tax return. That eliminates the need to exceed the miscellaneous itemized deductions floor of 2% of adjusted gross income before expenses can be deducted. Expenses beyond the $250 can still be deducted on Schedule A subject to that floor.
5. Go car shopping
One more deduction going by the wayside is the deduction for sales tax. This can come in handy if you live in a state with no income tax or if you pay little or no income tax. Currently you may deduct either state and local income taxes paid or sales tax. The sales tax amount can be either the actual sales tax paid for the year, or a calculated amount (based on income and exemptions) plus sales tax paid on the purchase of certain motor vehicles, boats and aircraft. If taking the sales tax deduction is more advantageous for you and you are planning to buy a car soon anyway, all else being equal, doing it before year-end may save you some money.
6. Lump together your itemized deductions
Speaking of those miscellaneous itemized deductions, it can be hard to meaningfully exceed that pesky 2% floor, as well as the now 10% floor for medical expenses (still 7.5% if you’re over 65). By planning out your expenses to lump them together, you can get more bang for your buck. For instance, you can accelerate some expenses into this year, or delay into next, and do the same at the end of next year so that larger amounts fall within one year.
7. Beef up or start a 401(k)
While IRA contributions can be made as late as April 15, contributions to 401(k) plans must be made by year-end to count for 2013. Not all taxpayers qualify to deduct IRA contributions, and adding to your 401(k) up to the maximum may be your only chance to get a tax deductible retirement contribution. If you can make up the cash flow shortage with other funds, bumping up your contribution percentage between now and year-end can help you get to your max.
For those self-employed business owners (ideally with no other employees) looking to stash some cash, consider establishing a solo-401(k) plan now; you can not only sock away the individual maximum, but can also add a contribution of up to 25% of your compensation or 20% of business profit, up to a total maximum of $51,000 for 2013 for those under age 50, and $56,500 for those 50 and older. That adds up to be considerably more than a contribution to a SEP-IRA.
8. Pay college tuition early
The American Opportunity Credit gives qualified taxpayers up to $2,500 each year for the first four years of a college education. To get the full $2,500 you need $4,000 of qualified educational expenses (paid during the calendar year, not the school year). For many schools, it’s no problem coming up with that and much, much more, but if your child goes to school at a community college or perhaps just one semester at a state school, you might be short. You can count tuition paid by loans, but not by scholarships or grants, so if your child received those, that can leave you short as well. You don’t want to leave money on the table if you can help it! Consider paying next semester’s tuition in December, or at least enough of it to get the maximum; tuition paid in the current year for semesters beginning in the first three months of the following year is eligible for the current year credit.
More from Credit.com