Reduce Your 2011 Federal Tax Bill While There’s Time
At the end of the year, most of us are caught up in Christmas celebration. Take a little time to also consider that, as the year closes, so does the window of opportunity to minimize your tax bill for 2011.
If you itemize, you can easily increase your deductions for 2011 by prepaying a few things that you will have to pay anyway, soon after the start of the new year. That means you are accelerating some expenses that normally would be part of your 2012 deductions. However, this is only a good strategy if you expect to be in the same or lower tax bracket for 2012. If you think your income in 2012 will rise enough to push you into a higher tax bracket, it might be better to save your 2012 deductions for next year.
Assuming your goal is to pay the least tax for this year, here are some things you can do.
· The easiest way to increase your deductible expenses for 2011 is to pay your January 2012 house payment by December 31st. That allows you to write off an additional month of mortgage interest expense. You can do the same with a mortgage on a vacation home.
· If you have state and local taxes – such as property tax — due early next year, you can also prepay those amounts by December 31st for a 2011 deduction.
· Medical expenses are only deductible to the extent they exceed 7.5 percent of your adjusted gross income. But if you have substantial medical expenses, you can maximize your deduction by purchasing items you will need anyway, like new eyeglasses, dental work, and prescription refills.
· Pay ahead on such items as investment fees, tax preparation (including the purchase of tax preparation software), expenses you will pay for job hunting. These appear on your tax return as miscellaneous deductions, which count to the extent they exceed 2 percent of your adjusted gross income.
· If you make a major purchase before year end, like a boat or a car, you may be able to benefit from the sales tax deduction, but only if you itemize. Generally taxpayers use the IRS-provided tables to calculate this deduction, but if you’ve saved receipts all year and believe you can exceed the amounts in the tables, you can take the higher amount. This tax break is especially helpful for people who live in low or no personal income tax states. Taxpayers can deduct either the state and local sales tax they pay, or the state and local income tax they pay, but not both.
· If you will owe college tuition for early 2012, you may be able to maximize your tax credits for college education. Eligibility for these credits depends on your adjusted gross income so you should contact your tax advisor for details.
· Of course you can also increase your charitable contributions. In spite of a sputtering economy, we Americans gave more than $290 billion to charity last year, according to the Giving USA Foundation (an increase of 3.8 percent from the previous year). About 35% of those contributions were to religious organizations. Once again, to deduct donations, you must itemize. Keep in mind you need written proof of contributions you want to deduct, such as bank or credit card records that list the date, amount, and the name of the charity. For donations of at least $250 you’ll also need an acknowledgement from the charity. For noncash donations worth more than $500, you must submit an additional form. Assuming you need to be able to deduct the donation on your taxes, make sure the charity is qualified to receive tax deductible gifts. Check with the IRS under Search for Charities, for this information.
For more complete information about how to minimize your tax bill for 2011, contact your tax advisor.
Teresa Ambord is a former accountant and former Enrolled Agent for the IRS. Now she’s a full-time business writer from her home in rural northern California. She also writes short stories for families from a Christian worldview, available in Kindle version at Amazon.com. Check out Material Girl, a short Christmas story about a girl who is determined to receive expensive presents in a year when the economy has rocked her family’s finances. Gerard T. Rubble: He’s Nothing But Trouble, a story about a bully, that takes place at Thanksgiving, but is entertaining all year round. For eBook or paper versions visit Teresa’s Website at Ambertrees.com.