Year End Tax Planning and Tips
December 8, 2008
Year end tax moves are your last chance to squeeze a little money out of what’s been an expensive year for most of us. With all the upheaval in politics, the economy, financial institutions, and the housing market sometimes it feels like it’s all out of your control. Here are a few things you can still do to lower your tax bill this year.
Extra Mortgage Payments
Making one extra mortgage payment a year can reduce a 30 year mortgage to a 23 year mortgage. That’s seven years wiped away from your mortgage! Also, it’s more mortgage interest that you can deduct on your 1040 return if you itemize your tax deductions.
Most mortgages will give you an option to pay above and beyond your monthly payment. However, to ensure that the extra payment goes towards the principal amount of the mortgage rather than prepaying future mortgage interest, write a check for the current monthly payment, and then write another check for the extra amount you want to pay.
Write on the check, “apply to principal”. The mortgage company might still have to apply some of the money to interest, but the majority will help pay down your principal amount.
If you don’t have the money to make the extra payment, just make it early. Send in your January payment in December you can deduct the interest paid on your 2008 tax bill if you itemize.
If your motivation to succeed and build wealth during your lifetime is generated by the thought of helping others and giving back to your community, then you will have a good chance of reaching your financial goals.
The reason we should seek to build wealth is to provide for our family and give back to others. This is the beauty of a free market economy. If the government doesn’t get in the way of you becoming wealthy, you will have the chance to give back abundantly to those that need it most. Most self-made millionaires are very generous, and the secondary reward for being generous with your money is a tax advantage.
Every dollar that you give to a qualified charity this holiday season can be deducted on your taxes. Don’t forget to check if your employer offers any type of charity matching program.
Max Out Your IRA and 401k Contributions
If you have a traditional IRA, company sponsored 401k or 403b retirement account, your contributions for the year will lower the taxable amount of income on your tax return. So, if you have some money left over at the end of the year that you don’t know what to do with, throw it in your retirement account.
Check with a tax professional about this, but usually you can contribute to an IRA up until April 14th to be able to count it on your previous year’s return. if you have a Roth IRA, the contributions are not tax deductible, because the gains are not taxed when you withdraw the money at retirement.
Watch Out for Capital Gain Distributions
Kristine over at Beacon Financial explains this one:
“This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund. This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.”
So what can you do? Here is what Kristine advises:
“If you have a fund that is expected to distribute a large capital gain, and this fund is held in taxable accounts, you can sell before the distribution date to avoid sharing in the capital gain distribution. You should check with your tax professional to see if this strategy makes sense for you.”
Close On Your Home This Year
If you are close to buying a home, try to speed up the process and close before December 31st. If you do, there could be tax savings for you.
You can deduct any pre-paid interest points that you pay on a mortgage; you can also deduct private mortgage insurance payments if your lender required you to pay it due to a smaller down payment.
If your move is long-distance and due to a job change, you may also be able to deduct your moving expenses.
Tax Deductions vs Tax Credits
Credits are better than deductions. Comparing a $1,000 tax credit to a $1,000 tax deduction, assuming a person earns $60,000 a year and is in the 25% tax bracket, the credit will let you keep $750 more than the deduction.
If you owe $15,000 in taxes a $1,000 credit will reduce the amount you owe to $14,000.
A deduction, on the other hand, only reduces the amount of your income that can be taxed. So a $1,000 deduction reduces your taxable income to $59,000 and you still owe $14,750
Tax Credit – $14,000 owed
Tax Deduction – $14,750 owed
These tax tips could help your bottom line this year, but remember, I’m not a CPA so please check with your tax professional before implementing any of these tips.
All posts by Erik