The end of the year is near, and holiday cheer is here, but in the mist of gift-wrapping and baking, it might not be a bad idea to prepare for tax season.
The time to file to Uncle Sam isn’t far away, and taking some time to squeeze in these steps during the holidays could be an extra gift to you in 2012.
1. Start Thinking About Deductions
As the end of the year approaches, decide if you will use standard or itemized deductions on your tax return. When filing your federal income tax return, you have the option. Choosing to itemize deductions depends on how much you spend on certain expenses such as money paid for medical care, mortgage interest, taxes, charitable contributions and more. To find which option will give you the lowest tax, the IRS offers this guide sheet.
If your itemized deductions will be more than a standard deduction (($5,800 if you are single or $11,600 for those married filing a joint return), it could result in savings.) Make this decision now so if you choose to itemize you are able to write off expenses before the end of the year.
2. It’s Better to Give Than to Receive
This holiday season, take the initiative to give it all away. By itemizing your deductions you can deduct your contributions to charitable organizations to increase your tax break. Donate toys, clothes or furniture to organizations such as Goodwill or the Salvation Army. According to H&R Block, with a receipt of the donation, you can deduct the item’s current fair market value on your tax return — the amount someone would pay for it at a garage sale, for example. Just make sure you donate before January 1st, not on or after the date!
IRS-certified qualified organizations include nonprofit religious groups, nonprofit educational groups and nonprofit charitable groups. For more on what and how you can write something off, visit here.
3. Money Talks
If you don’t have items to give away, give money. Money donations are donations made directly to a nonprofit organization using only cash, check, credit card, debit card, payroll deduction or automatic withdrawals from your bank account. If you are not sure if the organization you are donating to is IRS-approved, ask a group official for the organization's tax ID number. If you are mailing your contribution, again, make sure that you mail it before year-end.
Gifts to family members, for example, do not count as taxable deductions; however, if the gift is less than $13,000, you will not have to pay a gift tax.
4. Double Up on Your House Payment
Prepaying your January mortgage payment in December will credit that mortgage interest to 2011, further increasing your itemized deductions.
According to bankrate.com:
Unlike rent, which you pay beforehand (i.e., your Jan. 1 bill covers your stay in the rental unit for that coming month), your mortgage payments are made at the end of your occupancy period. That means your Jan. 1 mortgage statement represents interest for the month of December, making it a tax-break-eligible bill for this year.
5. Beware of Your Flexible Spending Accounts
Flexible spending accounts, sometimes called flex plans, are benefits that companies offer that allow employees to steer part of their pay into a special account that can be tapped to pay child care or medical bills.
The benefit of the money is that it avoids income and Social Security taxes, but if you don’t use it before the end of the year, you lose it and forfeit the excess.
Check with your employer to see if there is a grace period that may allow you to spend 2011 set-aside money in 2012. If not, make a last-minute trip to the drug store, dentist or optometrist to use your funds!
The end of the year is near, but it’s not too late to make the most of your money.
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(Photo: John Gress/Reuters)