As the year draws to a close, now is not the time to just think about the upcoming Christmas season and the gifts you need to buy, but also to think of last minute things you can do to lower your tax burden in just a few months as you plan to prepare your annual taxes. There are several things you can do now to reap greater deductions this upcoming tax season.
Donate to Charity. If you itemize on your tax return, consider donating extra items around your home. Do you have old clothes or furniture that you would like to replace? Donate it to charity and keep an itemized list. Goodwill has an online guide of the typical value of items they resell in their stores. You could use this as the basis of your donation amount. Also, if you donate money, make sure to keep the cancelled check as evidence of the donation. (Amounts over $250 will also require acknowledgement from the charity.)
Make Improvements to Your Home. This is the last year for the home energy tax credit, so if you are able, consider making last minute improvements to your home with new windows, insulation, air conditioning and heating systems, doors and skylights. You will be able to claim 10% of the price of improvements up to $500 in tax credits (but only $200 for new windows alone). This credit is only good if you haven’t claimed the home energy credit in previous years.
Sign Up for the Maximum FSA Allowed. Now is the open enrollment period for Flexible Spending Accounts. If your employer offers one, you may want to consider signing up for the maximum amount for 2012 because in 2013, FSAs will be limited to no more than $2,500. These can be used to cover out of pocket medical and dental expenses in addition to other items, and the money is taken out of your paycheck before taxes, which will lower your overall net income for your 2013 tax returns.
Reevaluate Your Withholding. If you get a large tax return every year, now is the time to re-evaluate your tax withholding. You can use the online IRS withholding calculator to get a good idea of how many allowances you should be taking. Ideally you will get a small refund or owe just a few hundred dollars on April 15th rather than getting a refund worth thousands of dollars. If you do decide to take more allowances, simply go to your payroll office and file a new W-4. One caveat: If you do take more allowances, you will find an increase in your paycheck each pay period. Make a plan for what you will do with the extra money before you begin receiving it so it doesn’t simply get absorbed into your regular budget.
We are entering the last month of the year, so there is not much time left to take action to lower your tax burden next year. However, many of these suggestions can be easily implemented and can lower your tax burden, so they are well worth looking into. Consider it your gift to yourself.