You can lower your taxes for this year now, but not after December 31.
It’s that time of the year again when you are preparing for holiday parties, agonizing over gift lists and rushing to get everything done in time. Take a breather and consider the following ways in which you can save money on taxes this year. Most of these money saving tips expire on Dec 31 though, so hurry!
- Sell and claim capital losses: If the recent downturn in the markets left you with losing investments, you can sell them and use the loss to reduce your taxable capital gains. After your capital losses cover your capital gains, you can further use them to deduct your taxable income by up to $3000. Moreover, you can carry over any remaining capital losses to next year and beyond. All of this will reduce your tax bill. However, be careful in selecting the stocks/bonds you want to sell. Don’t end up selling something promising just to reduce your gains because you won’t be able to buy it back for another month without losing the tax advantage (wash sale rule). Also, this idea works only for taxable accounts such as your brokerage account. There is no point selling in your IRA where your investments are tax sheltered anyway.
- Prepay expenses that are deductible: If you expect to be in the same or lower tax bracket next year, prepay mortgage interest or property taxes this year. This will allow you to claim the deduction early. For example, if you or your spouse expects to be without a job next year, you as a couple are probably going to be in a lower tax bracket soon and will have less taxable income to deduct from. To reduce this year’s higher taxes, consider increasing deductions by prepaying deductible expenses.
- Donate stock to charities: Instead of writing a check, donate to charity stocks that have appreciated a lot since you bought them. You will be able to deduct the entire market value of the stock for tax purposes. The charitable organization will be able to cash it without paying as much taxes as you would have. Everyone wins.
- Take advantage of energy and home buyer credits: Get your share of the stimulus goodies by claiming energy or home buyer credits. If you’re house hunting, remember to take advantage of the $8000 first-time home buyer credit, or the $6500 existing home buyer credit. If you had eco-friendly improvements done to your home (solar-powered heater, energy saving windows etc.) you can deduct 30% of their cost up to $1500.
- Contribute to your IRA: If you are under 50, you can contribute up to $5000 to your traditional or Roth IRA in 2009. If you are over 50, you may contribute an additional $1000 in catch-up contributions. If you have extra cash, salt it away in your IRA because not only will you be saving but your savings will multiply tax-deferred.
Tax is like an extra expense. Avoid it anyway you can and the time to think about it is NOW.