Year-End Tax Tips
By Stacey L. Bradford
Associate Editor, SmartMoney.com
THINK DECEMBER IS JUST about the holidays? Au contraire. It's also a prime time for reducing your looming tax bill. Wait until April and it could be too late to take advantage of a handful of tax-saving maneuvers. Here are five year-end tax moves you should be making now.
1. Be Giving
It's always nice to give to your favorite charities -- especially around the holidays, when that spirit of giving permeates the air. But doing good for others can also do wonders for your tax bill. Donations made to qualified charities before year's end can result in some serious tax savings.
But there are a few things to keep in mind. Most importantly, you won't be able to get that tax break unless you itemize your taxes. Also, when you're donating cash, make sure you use a credit card, suggests Donna LeValley, contributing editor to "J.K. Lasser's Your Income Tax 2008." If you write a check, there's a risk that the money won't clear until after the new year, in which case you'll have to wait until 2008 to take the deduction, she says. For noncash donations, make sure to keep a list of every sweater or piece of exercise equipment you give away and estimate its "fair market value." And don't even consider donating socks that need darning. The Pension Protection Act of 2006 stipulates that everything must be in "good used condition or better."
Read our story to help you determine if your contributions are tax-deductible. And click here for tips on finding a reputable charity.
2. Cut Your Losses
Is your portfolio weighed down by a dud? Consider selling that loser. The good news is that you can use that loss to offset capital gains generated elsewhere in your portfolio. Once that's done, investors can write it off against up to $3,000 in ordinary income. Fact is, many of us hold on to losing investments hoping to someday recoup our costs when a better strategy can be to sell at a loss, take the tax break and move on to a better investment. Click here for the ins and outs of capital gains.
One word of caution, though. You can't sell your shares, take the deduction, and then buy back the same stock in a 30-day period. According to the IRS, that would violate "wash sale" rules. For more details on these rules, click here.
3. Prepay a Few Bills
If you prepay a few of your 2008 bills in 2007, you'll get to write them off this year. Homeowners, for example, can make their January mortgage payment in December, giving them one more month of interest to deduct. And if you have large and predictable medical bills, such as braces for the kids, consider making all the payments before Dec. 31. (The IRS allows families to itemize and deduct medical and dental expenses that exceed 7.5% of your adjusted gross income.) Read our story for more on this tax strategy.
Another tip for parents: Contribute to your child's 529 college savings plan. A number of states allow parents to write off contributions up to a certain dollar amount. New York State, for example, allows each parent to deduct $5,000 from state income taxes. To see if your state offers this deduction, log onto SavingforCollege.com. Don't have a 529 plan set up yet? Read our story for more on selecting one.
4. Go Green
Looking for a home improvement project to tackle over the holidays? This is your last chance to make your residence more energy efficient and qualify for a tax credit worth up to $500 to help defray the cost, says Mark Steber, vice president of tax resources for Parsippany, N.J.-based accounting firm Jackson Hewitt Tax Service. Qualifying items include everything from insulation and exterior windows to hot-water boilers and oil furnaces. Click here more details on this tax break. Want to take that earth-friendly attitude on the road by buying a hybrid car? If you're eyeing a Honda, you should act now to get the full alternative fuel hybrid tax credit. Say you plan on buying a Honda Civic CVT before year-end. You could get as much as $2,100 in tax savings. Wait until after Dec. 31 though, and the credit shrinks by 50% to $1,050. Drag your heels until the second half of 2008 and the credit falls to just $525. By 2009, it's gone entirely. That's because the hybrid tax credit phases out once a manufacturer sells more than 60,000 hybrid vehicles. Credits for the popular Toyota and Lexus hybrids, for example, have already expired. Credits for the less popular Ford and GM models, meanwhile, should still be available in 2008.
Finally, don't forget that each year Uncle Sam allows you to give any individual a $12,000 tax-free gift. If you're married, you and your spouse can combine your gift for a total of $24,000. Give to your children and grandchildren and you can actively reduce your future estate taxes.
If you have children who recently graduated from college or elderly parents on a limited income, you may want to consider gifting them stock instead of cash, says J.K. Lasser's LeValley. If they hold onto their shares until 2008, they may be able to take advantage of a new tax break. During 2008-2010, those in the 10%-to-15% tax brackets will pay 0% on long-term capital gains.
Click here for more year-end tax planning moves.
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