New Year’s Eve is almost here, but don’t let that stop you from making some important money moves now, before Dec. 31, so you can reap the benefits in 2011.
Check your paycheck
Did you get a raise, a promotion, or tie the knot? If you were lucky enough to increase your income as a result of these or other benefits, you may need to adjust your withholding for December. If you’re withholding too little from your paycheck, you’ll end up with a higher tax bill in April. Contact your HR department to request a withholding change on your W-4 form for more to be taken out of your last few paychecks. If it’s too late to do that, you have until January 15 to pay estimated taxes on Form 1040-ES. If you’re getting a bonus that could put you into a higher tax bracket, ask your boss if you can receive it next year instead.
Use a tax calculator to help you estimate your liability. When doing so, don’t forget to include any retirement distributions, unemployment income, and in some cases, social security income you received. If you had to dip into your retirement funds to stay afloat, you should definitely check your tax liability and adjust your withholding. Even if you were unemployed while doing so, you’re taxed at your regular tax rate plus an additional 10 percent if you weren’t 59.5 years at the time of the retirement distribution. If those distributions were related to a hardship, like saving your home from foreclosure, tell the administrator of your retirement fund. You may be able to forgo the additional 10-percent tax, but you have to notify them in advance so they can code your distribution as a hardship on your 1099-R.
Max out your retirement accounts
Whether your company matches your contribution or not, your 401(k) is still one of your top savings vehicles, and you should fund it as much as possible by year-end. The maximum contribution in 2011 is $16,500, plus a maximum “catch-up” contribution of $5,500 for those 50 and older.
Contributing to an IRA is also a great way to reduce your tax liability, although you can wait all the way till April 17, 2012 to make a contribution for 2011. You can contribute up to a maximum of $5,000, plus an extra $1,000 if you are 50 or older depending on your modified adjusted gross income. Use the TurboTax IRA calculator to calculate how much you can contribute.
Cut your losses
The end of the year is a great time to review your investment portfolio and your asset allocation. If you have a dog of stocks or a mutual fund that you want to eliminate, it’s often a good idea to do it by Dec. 31st. The losses you take can offset the gains you made on other stocks or funds, and help reduce your tax bill. For example, say you sold your stocks and made $10,000. Let’s also say you have a poor-performing mutual fund that, if you sold it, would result in a $5,000 loss. When taken together, the losses from selling leave you with a net taxable gain of $5,000, far less than had you not sold the poor performer. If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary.
Check your health
Book last-minute trips to the doctor so you can start 2012 with a clean bill of health — and more tax deductions.
Medical expenses used to improve your health are tax deductible if you itemize deductions and they exceed 7.5 percent of your adjusted gross income.
If you’re enrolled in your employer’s flexible spending account, use any remaining funds (you can sock away up to $5,000 annually on a pre-tax basis) in them to pay for doctor visits and prescriptions. Although you avoid income and Social Security taxes from your contributions, any excess funds not used by the end of the year are forfeited. If you don’t have one yet but want one, typically open enrollment is the only time to make changes to your healthcare plan. If you experienced a “qualifying life event,” such as a marriage, divorce, new child, a change in your employment, or you went on family medical leave, you’re probably eligible to get this account before open enrollment starts again next fall.
Tis the season for gift giving, and if you have been one of the lucky ones who did better financially than you expected, maybe you are up for sharing more of it. Donating money is usually deductible — as long as you itemize. If you are donating your services, only mileage is deductible, and not the time you spent. If you’re donating goods, like that furniture or clothing collecting dust in the basement, you can receive a deduction of up to $5,000 on your taxes without an appraisal. Just make sure you get a receipt for any donation over $250, and you must use thrift shop value to value the property.
The cold weather currently is a good prompter for you to make energy-efficient improvements to your home so you can take advantage of the Residential Energy Tax Credit. If you make eligible energy-efficient improvements on your principal residence, you may be eligible for a credit of up to $500 for insulation, roofs, or doors if you install them before December 31st.
Speaking of home tax deductions, consider paying January’s mortgage in December. Making that early loan payment will increase your mortgage deduction on your 2011 tax return.
Visit the TurboTax blog website for these, and more, helpful tax tips.