With the end of the year near, it's coming down to the wire for some tax moves you'll need to make by December 31st in order to save money on your 2010 taxes.
There's a lot of talk about Roth IRA conversions and reducing your tax hit by making that change by year end, but there are also some simpler steps you can take now that could put more money in your pocket—or at least reduce the amount you'll owe to Uncle Sam.
- Check you withholding status.
If you think you're going to be due a refund, reduce your withholding taxes for the last pay period of 2010. Get that some of that extra money now. A bigger paycheck could help you boost your savings—or give you a little extra cash for holiday shopping.
- Increase 401(k) contribution.
If you haven't "maxed out," you can still reduce your taxable income a little more by raising your 401(k) contribution for the last pay period of the year. Employees can contribute up to $16,500 in a 401(k) or 403(b) plan this year, and up to $22,000 if you're age 50 or older. Contact your benefits department today.
- Stock up on nonprescription drugs with flexible spending account funds.
- Use your FSA money before the end of the year to buy more Tylenol, Sudafed, Motrin and other over-the-counter drugs. Starting in 2011, flexible spending accounting and health savings accounts can generally not be used for nonprescription drugs.? ? ?
- Give the gift of college, avoid gift tax and get a state tax deduction.
Contributions to a 529 college-avings plan have to be made by year end to take advantage of state tax deductions or credits, if your state offers one. Parents and grandparents can give gifts of up to $13,000 per child without paying gift tax. Under the IRS' five-year rule, you could also gift $65,000 (5 times $13,000) per student in one year and still not pay a gift tax. You can send a gift directly to a child's 529 plan using "UGift" at www.529.com .
- Plan for tax credits.
Getting a credit, a dollar for dollar reduction, is the best way to save on your taxes.
Hybrid, diesel and compressed natural gas vehicles purchased after Dec. 31, 2010 will no longer be eligible for federal tax credits. (The tax credit for 2010 Nissan Altima Hybrid is now $2,350, for example.) Tax credits for electric cars and plug-in hybrids, like the Chevy Volt, will likely stay. But may others are going away. There's a great list on Edmunds.com . (The hybrid credit for a number of cars, such as Toyotas and Fords, has already expired.)
Delaying an anticipated home improvement could also cost you. The federal tax credit worth up to $1,500 for energy-efficient home improvements will expire at the end of the year. So get that new water heater, set of windows or insulation now.
- Make charitable contributions.
In addition to monetary contributions, clean out your closets and make sure to make that donation to charity by the end of the year. Clothing and household items need to be in good, used condition or better. Get a receipt. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Gifts of appreciated assets had the added benefit of qualifying for fair-market value without any capital gains tax on the unrealized gain.?