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.  

Charitable Contributions

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.

Tax Credit
If you owe $15,000 in taxes a $1,000 credit will reduce the amount you owe to $14,000.

Tax Deduction
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

Bottom Line
Tax Credit – $14,000 owed
Tax Deduction – $14,750 owed

Tax Disclaimer

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.


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Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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6 Responses to Year End Tax Planning and Tips

  • Eric J. Nisall

    One thing I forgot in my original response that was not mentioned specifically, was to take care of all medical visits and procedures in the current year. By grouping all medical expenses within a calendar year, the chances of reaching the 7.5% of AGI floor is more likely.
    Also, tuition payments covering periods in the first 3 months of 2009, the expenses can be claimed on the 2008 tax return.

    For more tips on getting ready for the upcoming tax season, I have listed some tips in my article Get A Jumpstart On Your 2008 Tax Return By Getting Organized Early

  • Eric J. Nisall

    With regard to avoiding tax liability on capital gains distributions, it is very important to do your research. For one thing, the fund may have sales fees attached to it if it is ot held for a certain amount of time. Secondly, you have some funds which pay what is called a return on capital which is not taxed at all; it is simply a payment back to fund owners of excess cash in order to be tax-friendly. Lastly, selling may not be a viable option, especially if you have held the fund less than a year, and will have made a net profit on the sale.

    Another thing that people can do is to sell off some of their losing stocks/funds to help offset any capital gains from sales or distributions, and as a bonus, any losses in excess of gains can be used to offset earned income up to $3,000 per year, thereby further reducing the tax liability.

    There are a couple of tips to help reduce the amount of taxes paid throughout the year in paychecks which I write about in my article Don’t wait for your tax refund, increase your take-home pay today. so that people do not have to give the government an interest-free loan for a year or more.


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