You may be preoccupied with getting the right gifts for everyone on your holiday gift list or what to wear to that big holiday party – but you should also be thinking about how to tune up your finances. And although April 15 may be months away, there are strategies you should be executing now to reduce your tax bite when you file your return. Yes, now. If you wait until the new year, many of these strategies will no longer be available to you – at least until the end of next year.
Map Out Upcoming Major Expenditures and Life Changes
If you’re buying a house, getting married or taking on college tuition for yourself or your offspring, your finances will reflect a major change. Now is the time to adjust your budget to accommodate additional spending. If you need to borrow to cover the extra costs, you should begin getting your financial house in order now.
Check Your Credit Report
Every consumer is entitled to obtain one free credit report every 12 months from each of the three major credit reporting bureaus: TransUnion, Equifax and Experian through the AnnualCreditReport.com website. Checking on your credit now can help you avoid nasty surprises such as being turned down for a car, a house or a job because of erroneous items on your credit report. If your credit report contains adverse items that are accurate, you can begin to work on clearing them up now.
Review Financial Portfolios
Whether you’re a major player on the stock market or just wish to accumulate funds toward your future retirement, the end of the year is a good time to check on your financial portfolio. Are you satisfied with the rate of return on your investments? If you’re saving for retirement, are you on track to have enough money to actually be able to stop working? Did you post big gains or major losses? Either scenario translates into potentially significant implications for next year’s tax returns. And if you don’t have any savings or investments – now is a great time to start putting money away.
Defer (or Boost) Income
If you’re close to the low or high end of your tax bracket, consider deferring income until next year. On the other hand, you may wish to boost your income if you’re planning to make a major expenditure in the coming year. If you’re employed, ask your supervisor or Human Resources director to defer your final paycheck for the year until after January 1. If you’re self-employed, delay certain invoices to delay income or provide incentives (such as a discount) for early payment to boost income.
Re-evaluate Your 401(k) Contributions
Does your company match or your contributions to your 401(k) account on a 1 to 1 basis? If so, it makes sense to pour in every dollar you can afford. Even if your company doesn’t contribute a single penny, maxing out your 401(k) can be a good strategy, especially if your contributions are made from pre-tax dollars. More money toward retirement plus a lower tax bill equals a win-win strategy.
However, simply making deposits with no thought about how those dollars are being invested is not smart. If you’re in your 20s, 30s or 40s, you can afford to be more aggressive in how your dollars are invested – weighing more heavily toward stocks and other potentially high-growth financial instruments. On the other hand, if you’re older than 50 or so, or if you simply can’t afford to lose any of your investment dollars, you should lean toward “safer” investments such as bonds.
Get Dental and Vision Checkups
If you have dental or vision insurance, the policy probably includes at least one annual checkup. If you haven’t had yours yet, do so before the end of the year. After all, you’ve paid for it. And if you you’ve neglected to obtain health insurance, be prepared to pay a hefty penalty on next year’s return unless you can qualify for an exemption.
Drain Your Flexible Savings Account
Many companies offer Flexible Savings Accounts as a healthcare related benefit for their employees. FSAs can be established for general healthcare related expenses or for dependent care. Contributions come from pre-tax dollars and there is no restriction about the type of health insurance policy the employee has. In fact, employees aren’t required to have health insurance at all. The catch? Any unused funds at the end of a calendar year are lost (with the exception of 500 dollars that can be carried over into March of the following year). So if you don’t have dental or vision insurance – get those checkups now. Splash out on an extra pair of glasses or contacts if you wear them.
Max Out Payments for Tax Deductible Expenses
Do you own a home? Are you paying for a student loan? These types of expenses are tax deductible. Pre-paying one month of your mortgage or your property taxes increases the amount of interest that you can deduct on the following year’s tax returns. Likewise, making an extra payment on your student loans adds to the amount of interest that you can deduct once April rolls around. And if you’re paying college tuition for yourself or a dependent, pre-paying January tuition boost the amount that you can count toward claiming the American Opportunity Tax Credit.
Pre-Pay January Credit Card and Utility Bills
If you’re using your credit cards and utilities for business-related purposes, your expenses are potentially tax deductible. If you’re self employed, you can deduct eligible utility expenses through Schedule C even if you don’t itemize. You can also deduct what you charge on credit cards for business-related purposes on Schedule C. If you’re employed by a company, you’ll need to itemize and claim eligible expenses on Schedule A. Either way, keeping meticulous financial records is a must.
Make (and Document) Charitable Contributions
You’re already filled with the spirit of giving, so why not add your favorite charities or nonprofit organizations to the list? You can give cash or material goods, and receive a tax deduction for your gift. However, you must obtain (and retain) a receipt from the charity or nonprofit organization to document the value of your gift.