Year End Tax Moves

With just a month left in 2011, it’s time to consider what year end tax moves you should make to minimize your tax bill. Here’s a few tips to consider:

Grab some itemized deductions…but only if it will benefit you.

While most people know things like medical expenses, charitable donations, and even work-related expenses can be deducted, fewer people understand the basics of when these deductions actually help. Everybody gets a “standard deduction” of $5,800 for Single filers, $10,600 for Married Filing Jointly, and $8,500 for Heads of Household (basically, single people who support a household for their dependent child).

If the total of your individual deductions doesn’t add up to more than the standard deduction, then don’t worry about saving those charity or medical receipts. In general, most people who aren’t homeowners just take the standard deduction because mortgage interest is what pushes most people close to, or over, the standard deduction amount.

Plus, medical expenses and work-related expenses have additional hurdles to clear. Medical expenses have to exceed 7.5% of your income (technically, your AGI, but “income” is plain-speak approximation) before they’re deductible…work-related expenses have to exceed 2% of your income.

The IRS provides a reasonably concise summary of the ins and outs of what’s deductible and when to itemize in Topic 500.

One last consideration…if you expect your situation to change considerably next year, that can affect when you want to pay certain expenses for tax purposes. For example, let’s say you’ve paid a bunch of medical expenses, still have a few bills to pay, but don’t expect to have a lot of medical expenses next year. In that case, you’d probably want to pay all those medical bills by the end of the year if you can. If you wait, you might not receive a benefit from the deduction next year since your total medical bills will (hopefully) be much lower. Another common example is property taxes. Many states and cities don’t require the second half of a property tax assessment to be paid until the following spring. But if you know you’re itemizing this year, and you might not itemize next year (paying off your house so no mortgage interest, lost a job so lower state taxes, etc.), then it may make sense to go ahead and pay your full property tax bill in the current year.

Note: see the final tip for info about TaxCaster, a tool that may help you with this tip.

Lower your energy bills AND tax bill…but act fast

As I wrote in this previous post, a number of energy credits are set to expire this year. Certain credits for less common items like solar and geothermal installations are scheduled to remain in place until 2016. But common and fairly simple improvements like insulation, energy efficient doors and windows, and a handful of other items qualify for a tax credit that expires at the end of this year. Don’t miss out if you’re planning to make some home upgrades.

Some deductions can wait until April, and still count for this year

If you have an Individual Retirement Account (IRA)–including Roth and SEP IRAs–or a SIMPLE plan, you can wait until the tax filing deadline to make your contributions. (Note: If you have not set up a SIMPLE plan by the end of the year, you can’t make contributions retro-actively.) The same is true for Health Savings Accounts (HSAs). So if you’re thinking about any of these deductions, you may want to wait until you’ve done the first draft of your tax return so you’ll know exactly how much you want to contribute based on the tax impact.

Push that kid out by the end of the year!

Expecting a child? Get that kid delivered by the end of the year and you get a deduction and credit for the whole year! OK, only kidding on that one. But just a note for people who had a child, or adopted a child, during the year, you get to take all the deductions and credits for the child just as if the child was in your home all year long.

Get a preview

There are a number of free tax estimator tools on-line. One I find is pretty intuitive and produces trustworthy results is TaxCaster, made by the same company that makes TurboTax. If your situation isn’t terribly complicated, you can enter your information from your most recent pay stubs and account statements to get a pretty good idea what sort of refund or balance due to expect. You can also play with the various deductions you’re considering to get an idea what impact they’ll have. This may be the easiest way to find out if certain itemized deductions will offer any tax benefit, especially deductions like medical expenses and work expenses that are linked to your overall income.

Finally, enjoy the holidays!

There’s more to life than money and taxes, after all. Even if you’re looking at a potentially nasty tax bill, don’t lose perspective on what really matters in life!


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