Right after the most wonderful time of the year comes everyone's least favorite season: tax season.
If you usually try to avoid thinking about taxes until after January 1, you may be missing out on the chance to save a little money. According to some tax experts, now is the time to take last-minute action if you want to reduce your tax bill in April.
Here are seven-year-end tax tips
1. Double-check your tax withholding and payments
“Before year's end, take a peek at your income,” advises Mary Kay Foss, a Certified Public Accountant with Sweeny Kovar in Danville, Calif. “Check your last pay stub and year-to-date income from brokerage accounts. Estimate December and compare the figures to what was on your last year's tax return. Also compare your withholding and scheduled estimated tax payments to last year.”
Why do all that? You want to be sure you have sent enough money to the taxman in 2013 and won't get stuck with a huge bill — or worse, penalties — in April.
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If your income has increased significantly but your tax payments have not, it is time to either ask your employer to increase your December withholding or send in extra with your year-end estimated tax payment.
2. Update your contact information
If you have moved in the past year, you don't want to miss any deductions because of mis-routed mail. Make sure your address and contact information is current with all the organizations that may be sending you tax forms. These include investment firms, mortgage companies, and your previous employer if you have changed jobs since the move.
3. Be extra generous
“Year-end is a good time to go through closets and cupboards and donate unwanted items to charity,” says Foss. “Be sure to get a receipt and you'll get a tax deduction as well as a warm feeling.”
Foss also says seniors should be aware that their ability to make qualifying charitable distributions from their IRAs is expiring in 2014. According to the California Society of CPAs, the Emergency Economic Stabilization Act of 2008 allows those age 70 ½ or older to transfer up to $100,000 tax free from their IRA to a qualified charity.
The provision allowing the distributions expires in 2014, although Foss says Congress could extend it. Still, seniors who want to be sure they can make this generous gift should take action by December 31 to ensure they don't miss their window of opportunity.
4. Focus on lowering your AGI
If you are going to be buying your own health insurance through a government exchange in 2014, you may want to work on lowering your AGI. “Affordable Care Act subsidies are based on adjusted gross income starting in 2014, so keeping that low is a priority,” says Foss.
One way to reduce your AGI is by asking your employer to defer any bonus pay until January. For those who are self-employed, you can delay invoicing clients in December and make those payments due next month.
5. Prepay your taxes
Another way to lower your total tax bill is to prepay your 2014 property taxes and state income taxes, if applicable. Both are deductible on your federal income tax form and can help increase your deductions.
6. Unload your losing investments
If you are going to be stuck paying a capital gains tax this year, think about unloading your underperforming investments. You can use your losses to offset your gains — and if your losses exceed gains, you could even write off up to $3,000 from your annual income. Think you lost more than that? No worries, since excess losses carry over year to year.
7. Make your large purchases now
Finally, if you are planning to buy a car, boat or other major purchase, you might want to squeeze that in before the end of the year.
“The sales tax deduction goes away in 2014,” explains Foss. “If you deduct sales tax rather than income tax, don't plan on it for 2014.”
While Congress could reinstate the deduction, Foss says it is better to assume it will be gone rather than to assume it will be back.
The taxman cometh, but you can still take some last-minute action to keep your money in your pocket and out of Uncle Sam's hands. If you need help, Foss advises individuals to read the instructions on their tax forms, head to IRS.gov for resources, or get a referral to a trusted CPA from family and friends.