Before the new year, consider donating cash, household items or a vehicle to charity; paying your January mortgage and April tax payments early; bunching up itemized deductions; and investing in energy-efficient home products.
Your old clothes, housewares and furniture are tax deductions waiting to be claimed. You can write off the value of these items if you donate them, in good condition, to a qualified charity. Above, volunteer Marsha Dickens, right, helps out high school senior Maricruz Rodriguez, 18, at the nonprofit Main Place clothing distribution center in Irving, Texas. (John Moore, Getty Images / December 21, 2011)
Year-end financial planning is probably the last thing you want to think about while you're whipping up eggnog. But spend a few minutes now and you can save a bundle on your taxes.
"No one wants to make the time at this time of year," says Philip J. Holthouse, partner at the Los Angeles tax law and accounting firm of Holthouse Carlin & Van Trigt. "But a little last-minute planning can reap rewards worth thousands of dollars." Charitable contributions: Gifts to charity soar near the holidays. Is it the spirit of giving or the pursuit of charitable contribution deductions? Either way, the charities can use the help — and your tax return will be better for it.
Don't have enough cash to make this year's charitable contribution before year-end? If you know you'll have the money in January — perhaps because that's when your company pays holiday bonuses — consider charging your donation to your credit card.
If the charge hits by Dec. 31, you get the 2011 tax deduction, even though you won't have to pay the bill until 2012. But make sure you don't donate more than you can pay off. A few months of interest on a high-rate credit card will wipe out the tax benefit you'd get from the deduction.
Make your January mortgage payment now: The mortgage payment that's due in January can be made in December, which allows you to write off the interest on the payment. Normally, you can't pre-pay interest, Holthouse notes. But in this case, the interest you're paying in January was actually accrued in December. Thus it's deductible as long as it's paid before year-end.
Consider making the April property tax payment too: If you've got the cash, it may also make sense to pay the second half of your property tax bill, which is usually due in April. A caution: If you earn more than $100,000 and have substantial itemized deductions, don't make the payment without checking to see if you'll be subject to the onerous Alternative Minimum Tax. The AMT refigures your tax based on a system that allows fewer write-offs. If you're subject to the AMT, you pay whichever is higher — your regular income tax or the AMT.
Bunch deductions: Miscellaneous itemized deductions can only be written off once they exceed 2% of your adjusted gross income. So now is the time to start adding up receipts. If you have already paid substantial deductible expenses for, say, professional dues or legal and job-hunting expenses, it might make sense to renew all your business subscriptions for several years to clear that threshold and get more bang for your deductible buck. But the same caution about the AMT applies. Make sure that you project your tax under both the ordinary system and the AMT before you pay. Otherwise you could lose the deductions for both years.
Clean the closets: Your old clothes, housewares and furniture are tax deductions waiting to be claimed. You can write off the value of these items if you donate them, in good condition, to a qualified charity. The deduction is limited to the current market value — roughly what you could get for the item at a swap meet or thrift store. But be careful. Congress has been cracking down on deductions of depreciated property because some taxpayers appeared to be claiming deductions for far more than the property is worth. Make sure to keep good records of what you donated. If you donate a single item worth more than $500, you'll need a qualified appraisal.
Car donations: If you're tempted to donate a used car, you might want to think twice. Congress passed a new law drastically restricting these deductions in response to abuses that indicated people were writing off far more than the cars were worth.
Under the new rules, the deduction you can take for donating a car is the lesser of the vehicle's fair market value or the value that the charity got when selling the car. Since some charities sell these cars at auction for just a fraction of their retail resale value, that could mean that the deduction you can take is for far less than the car is actually worth.
IRS Publication 526 gives a good example of a hypothetical taxpayer named Anita who donates a 3-year-old car with a Blue Book value of $6,000. To claim the deduction, Anita needs the charity to provide a form 1098-C, which shows what the charity received when it sold her used car. In this example, the charity resold her $6,000 car for $2,900. Her deduction is limited to $2,900. She would have been far better off selling the car herself and donating the proceeds.
There's one exception: If the charity is going to use the car to fulfill its charitable mission, rather than sell the car for cash, you can claim the donation at the fair market value. This exception would apply to a shelter that used your donated vehicle to pick up wayward youths, or a food pantry that used it to deliver meals. It could also apply to charities that resold the car at a discount to a needy individual, assuming that was part of the charity's mission.
The bottom line: Only donate a car to charity if you know precisely what the charity plans to do with it.
Invest in your home: A series of federal tax credits for buying energy-efficient windows, doors and appliances expire at year-end 2011. These credits can reimburse you for up to 10% of the cost of replacing windows, doors and skylights, or adding insulation, central air conditioning, heaters or water heaters. The credits, which cap out at $500, are complicated, though. They're subject to a host of limitations and certification requirements. If you've ever taken energy tax credits in the past, there are additional restrictions. The Alliance to Save Energy offers a nice tutorial on the credits (http://ase.org/resources/energy-efficiency-home-and-vehicle-tax-credits#home_improvement_11), which is worth reading before you buy.
Invest in your business: If you've got your own business — even if it's just moonlighting — there are numerous tax breaks available to you. One worth considering at year-end is the so-called 179 deduction for buying business equipment. Normally business equipment such as computers, software and copiers needs to be depreciated, or deducted over time. But in an effort to boost spending, the government now allows so-called 179 business expense write-offs of up to $500,000. If you need a new chair for your office, a better computer, even a nicer phone, buying it now could allow you to write it off on your 2011 return.
Don't forget your classroom: If you're a teacher and you haven't already spent $250 on class supplies, get them now. Up to $250 a year in books, supplies, computer equipment and other classroom supplies are deductible each year. If you're a teacher married to a teacher, the limit is $500 a year.
"No one wants to make the time at this time of year," says Philip J. Holthouse, partner at the Los Angeles tax law and accounting firm of Holthouse Carlin & Van Trigt. "But a little last-minute planning can reap rewards worth thousands of dollars." Charitable contributions: Gifts to charity soar near the holidays. Is it the spirit of giving or the pursuit of charitable contribution deductions? Either way, the charities can use the help — and your tax return will be better for it.
Don't have enough cash to make this year's charitable contribution before year-end? If you know you'll have the money in January — perhaps because that's when your company pays holiday bonuses — consider charging your donation to your credit card.
If the charge hits by Dec. 31, you get the 2011 tax deduction, even though you won't have to pay the bill until 2012. But make sure you don't donate more than you can pay off. A few months of interest on a high-rate credit card will wipe out the tax benefit you'd get from the deduction.
Make your January mortgage payment now: The mortgage payment that's due in January can be made in December, which allows you to write off the interest on the payment. Normally, you can't pre-pay interest, Holthouse notes. But in this case, the interest you're paying in January was actually accrued in December. Thus it's deductible as long as it's paid before year-end.
Consider making the April property tax payment too: If you've got the cash, it may also make sense to pay the second half of your property tax bill, which is usually due in April. A caution: If you earn more than $100,000 and have substantial itemized deductions, don't make the payment without checking to see if you'll be subject to the onerous Alternative Minimum Tax. The AMT refigures your tax based on a system that allows fewer write-offs. If you're subject to the AMT, you pay whichever is higher — your regular income tax or the AMT.
Bunch deductions: Miscellaneous itemized deductions can only be written off once they exceed 2% of your adjusted gross income. So now is the time to start adding up receipts. If you have already paid substantial deductible expenses for, say, professional dues or legal and job-hunting expenses, it might make sense to renew all your business subscriptions for several years to clear that threshold and get more bang for your deductible buck. But the same caution about the AMT applies. Make sure that you project your tax under both the ordinary system and the AMT before you pay. Otherwise you could lose the deductions for both years.
Clean the closets: Your old clothes, housewares and furniture are tax deductions waiting to be claimed. You can write off the value of these items if you donate them, in good condition, to a qualified charity. The deduction is limited to the current market value — roughly what you could get for the item at a swap meet or thrift store. But be careful. Congress has been cracking down on deductions of depreciated property because some taxpayers appeared to be claiming deductions for far more than the property is worth. Make sure to keep good records of what you donated. If you donate a single item worth more than $500, you'll need a qualified appraisal.
Car donations: If you're tempted to donate a used car, you might want to think twice. Congress passed a new law drastically restricting these deductions in response to abuses that indicated people were writing off far more than the cars were worth.
Under the new rules, the deduction you can take for donating a car is the lesser of the vehicle's fair market value or the value that the charity got when selling the car. Since some charities sell these cars at auction for just a fraction of their retail resale value, that could mean that the deduction you can take is for far less than the car is actually worth.
IRS Publication 526 gives a good example of a hypothetical taxpayer named Anita who donates a 3-year-old car with a Blue Book value of $6,000. To claim the deduction, Anita needs the charity to provide a form 1098-C, which shows what the charity received when it sold her used car. In this example, the charity resold her $6,000 car for $2,900. Her deduction is limited to $2,900. She would have been far better off selling the car herself and donating the proceeds.
There's one exception: If the charity is going to use the car to fulfill its charitable mission, rather than sell the car for cash, you can claim the donation at the fair market value. This exception would apply to a shelter that used your donated vehicle to pick up wayward youths, or a food pantry that used it to deliver meals. It could also apply to charities that resold the car at a discount to a needy individual, assuming that was part of the charity's mission.
The bottom line: Only donate a car to charity if you know precisely what the charity plans to do with it.
Invest in your home: A series of federal tax credits for buying energy-efficient windows, doors and appliances expire at year-end 2011. These credits can reimburse you for up to 10% of the cost of replacing windows, doors and skylights, or adding insulation, central air conditioning, heaters or water heaters. The credits, which cap out at $500, are complicated, though. They're subject to a host of limitations and certification requirements. If you've ever taken energy tax credits in the past, there are additional restrictions. The Alliance to Save Energy offers a nice tutorial on the credits (http://ase.org/resources/energy-efficiency-home-and-vehicle-tax-credits#home_improvement_11), which is worth reading before you buy.
Invest in your business: If you've got your own business — even if it's just moonlighting — there are numerous tax breaks available to you. One worth considering at year-end is the so-called 179 deduction for buying business equipment. Normally business equipment such as computers, software and copiers needs to be depreciated, or deducted over time. But in an effort to boost spending, the government now allows so-called 179 business expense write-offs of up to $500,000. If you need a new chair for your office, a better computer, even a nicer phone, buying it now could allow you to write it off on your 2011 return.
Don't forget your classroom: If you're a teacher and you haven't already spent $250 on class supplies, get them now. Up to $250 a year in books, supplies, computer equipment and other classroom supplies are deductible each year. If you're a teacher married to a teacher, the limit is $500 a year.
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