As the end of the year grows closer, it’s time to consider whether or not you can make any year-end tax moves that will reduce your tax liability or increase your refund. Income taxes are due on April 17th, 2012 this year, but before 2011 ends, it’s a good idea to take some time to draft your income taxes in order to get a better idea for where you stand financially. Will you owe more taxes than you expected this year? Are there year-end tax moves that you can make before the end of December to reduce what you owe, or even get yourself a refund?
Consider the following factors to see if it’s possible for you to improve your tax situation in December:
Should You Itemize?
As you get started with your financial analysis, take a close look at your deductions to determine whether you are better off itemizing instead of taking the standard deduction. If you are not anywhere near the standard tax deduction, you don’t have to worry about getting all of those details together to itemize. If your deductions are close, then it is worth the time and effort to take a closer look and see if you have enough (or can get enough) to itemize on a Schedule A.
Prepay Next Year’s Expenses
For tax-deductible expenses, you may want to consider paying bills that are due in January before the end of December. You can pay your January property taxes before the end of December and deduct them on your 2011 tax return. You can also pay your January mortgage payment before the end of December and be able to deduct another month’s interest on your current taxes. Both your property taxes and mortgage interest are deductible on your Schedule A.
Make Donations to Charity
If you haven’t donated as much as you had planned throughout the year, you can make a large donation to your favorite charities before the end of December. If you donate to qualifying charitable organizations, you can report the deductions on your Schedule A to reduce your taxable income.
Prepay Tuition Expenses
If you are paying for college tuition, it may be worthwhile for you to pay your tuition in advance in order to increase education-related tax deductions.
Contribute to a Health Savings Account (HSA)
If you have a high-deductible, HSA-eligible health insurance plan, making a contribution to your HSA will reduce your taxable income in a similar manner as contributions made to traditional IRAs. Report HSA contributions on IRS Form 8889.
Improve the Energy Efficiency of Your Home
There are a variety of energy-efficient tax deductions and credits available to homeowners. If your home could use new energy-efficient appliances or weatherization, check to see whether or not those home improvements will entitle you to a tax deduction or credit and, if so, consider making the improvements before the end of this year.
Year-End Tax Strategies for Business Owners
If you are self-employed, the end of the year is a good time to invest in supplies and equipment that your business needs. Qualifying tax-deductible business purchases reduce taxable business income, helping to decrease your own income tax liability.
Don’t wait until April to see where you stand. If you prepare for your 2011 income tax filing now, you will greatly increase your chances of lowering your tax liability.