Year-End Tips to Save Money on Taxes
Follow 5 simple strategies now to cut your tax bill.
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The end of the year is a busy time with holiday preparations and celebrations. December 31st is also an important deadline for your personal finances because it marks the end of the tax year.
Before you ring in the New Year follow these 5 Quick and Dirty Tips to save money on your taxes:
Tip #1: Make a Charitable Donation
When you make a donation to charity, you may also be eligible for a tax deduction. That’s a winning combination in my book! Consider making a charitable donation as an alternative to giving gifts during the holidays. To make your charitable donation tax deductible, you have to donate cash, write a check, or make a credit card charge to a qualified organization before the end of the year and itemize deductions on your tax return.
How Do You Itemize Deductions?
For example, the standard deduction for a single taxpayer is $5,800 for 2011. So, if you’re single and spent more than $5,800 during the year on certain types of deductible expenses—like charitable contributions, mortgage interest, and a percentage of your medical care—then you’ll come out ahead by itemizing.
Most people take the easy route and just claim the standard deduction each year. But guess what? Many of them end up paying more tax than they should. So be sure to keep good records of your deductible expenses throughout the year so you can pay as little income tax as possible or get a bigger tax refund.
Tip #2: Max Out a Workplace Retirement Account
If you have a retirement plan at work—like a 401(k), 403(b), 457, or government Thrift Savings Plan—take a look at how much you’ve contributed for the year. For 2011, you can contribute up to $16,500 or $22,000 if you’re age 50 or older. By the way, those amounts have been increased by $500 for 2012.
Every dollar that you contribute to a retirement plan on a pre-tax basis is income that you don’t pay tax on until you take a future withdrawal. Additionally, many employers match a percentage of what you contribute. That’s a smart way to build a nest egg and cut your taxes—and you don’t even need to itemize deductions on your tax return for that benefit.
Log on to your online retirement account, or ask your benefits administrator at work to boost your final contribution for the year so you can max out the account or get as close as possible—especially if you’re expecting a year-end bonus. While you’re making adjustments, go ahead and increase your contribution by at least one percent for next year.