"Tax time" isn't just April 15 (or whatever day you prepare and mail your return). There are opportunities all year long to minimize the amount of money you fork over to Uncle Sam.
Although the end of 2011 is near, it's not too late to make sure you don't owe more than you need to. Here are some tax-smart moves to make before you head out to that New Year's Eve party. Note that some of these tax saving strategies only apply if you can itemize your deductions and you're not subject to the Alternative Minimum Tax. You should check with a tax pro to see which strategies will work, and work best, for you.
12 Money-Saving Year-End Tax Tips
1. If you're expecting a big bonus at work soon, consider asking your employer to pay it to you in January. By deferring that payment, you'll lower your taxable income for 2011.
2. If you earn your income by billing people for your work and collecting payment, you might choose to delay sending out some bills until January, in order to reduce your 2011 income. Pay state estimated taxes each quarter? Send in your January payment in December, and you should be able to deduct them this year -- assuming you can itemize your deductions and you're not subject to the Alternative Minimum Tax.
3. If you have a mortgage, pay your January bill by December 31 and you may be able to deduct the interest in your 2011 return. (If you pay your property taxes and state or local taxes before year-end, you'll be able to deduct them, too.) Note, though, that some mortgage lenders won't cooperate and may apply your extra payment toward principal and not interest, or may just not include the extra payment on your year-end tax statement. You might want to check with yours first.
4. If you're generous with charities and you're sitting on some stocks that have grown nicely for you, consider giving appreciated stock to your favorite charities instead of cash. If you've held the stock for more than a year, you'll avoid paying tax on the appreciation, and you can still deduct the full value of the stock. Call your favorite nonprofit: The folks there will probably be able to help you with this. Even if you're just going to give cash, consider doing so before the end of the year.
5. If you'd like to take some extra deductions this year (ideally because your income is higher this year than you expect it to be next year), consider bundling some expenses. For example, if you typically give a lot to charity at the end of each year, you might go ahead and make both your usual 2011 contributions and your 2012 contributions at the same time. That way you'll get a bigger deduction -- and it might also make it worthwhile to itemize your deductions, as well.
6. If you're 70½ years old or older and you have a traditional IRA, you must take your required minimum withdrawals annually. Failing to do so can cause headaches -- and big penalties. (If you're feeling generous, you can donate that withdrawal to charity and thereby avoid having to pay taxes on it.)
7. If you're sitting on stock losses and gains, consider taking some losses now, to offset some gains. For example, if you sold stock and realized a gain of $5,000, you might have to pay 15%, or $750, in long-term capital gains tax on it. But if you also have a $2,000 loss on another stock, you can sell and realize the loss, and then subtract it from your gain. Presto -- you now have a net gain of just $3,000, and the 15% hit on that is just $450. If your losses exceed your gains, you can deduct up to $3,000 of them from your taxable income, and carry forward the remainder.
8. If you're planning to sell out of a mutual fund in the near future, check to see whether it has made its dividend and capital gains distributions, which often happens near the end of the year. If it hasn't, by selling soon, before it does so, you can avoid paying taxes on those distributions. You might even sell some funds you'd like to keep in order to avoid the distributions, buying them back after at least 31 days. (That's an IRS rule.) Meanwhile, if you want to buy into a fund, perhaps wait until after the distribution. You can call or Google fund companies to find out about distribution dates.
9. If you have children or dependents, have adopted a child, have education-related expenses, or have been hit with a costly natural-disaster loss, there are credits and deductions out there that you may be able to take -- some for several thousands of dollars. A credit will lower your tax bill dollar for dollar.
10. If you're planning on making some energy-efficient improvements to your home, pay for them by the end of the year, and they may help you snag a tax credit.
11. If you're eligible to make Health Savings Accounts contributions, you can send in a whole year's worth of contributions in December, which will lower your taxable income.
12. And finally, here's a big one: To build a better retirement, be sure to take advantage of IRAs. Most of us can contribute up to $5,000 per year to a traditional or Roth IRA, but those 50 and older can contribute $6,000. You can actually make your 2011 contribution any time up to April 17, 2012, but the earlier you do, the sooner those dollars will start working for you.
There are many other credits, deductions, and tax strategies that might serve you well. Some valuable ones may even expire after this year, so grab the money while you can. And remember that taxes can be complicated -- it might help to consult a tax pro, to find out exactly which strategies will work for you.