tax reduction strategies

The end of the year is coming.  The cold winter months of January and February will bring dreariness, depression, and tax forms!  Although the year is almost up, there are still some things you can do to lighten your tax burden or increase your refund for 2008.

Contribute to a retirement plan
Any money you contribute to a qualified retirement plan, such as an IRA, 401(k), 403(b), or any of the similar plans, can be deducted dollar for dollar from your taxable income.  And less taxable income means less taxes.  If you’re investing through your employer’s plan, you still have time to bump up your contribution amount for the remainder of the year.  Even though you probably have only one or two paychecks left in 2008, increasing your retirement contributions could earn you a couple hundred bucks back from Uncle Sam and his Cousin Oliver.  You don’t even need to itemize your deductions to take advantage of this.  It just comes right off your income.  Not to mention, now is a great time to be buying stocks.

Give to charity
Charities are always ready to accept your donations, but there’s no better time than Christmas to clean out your closets and open your checkbook.  Like retirement contributions, charitable donations are subtracted from your income, but you’ll need to itemize your deductions to take advantage of this one.  Add up all your deductions, and if they’re greater than the standard deduction, you’re making money!  Charities always need help, and you can benefit yourself and the charity by giving at this time of year.

Use all the money in your flexible spending account
If your employer offers flexible spending accounts for medical or child care expenses, don’t forget to check your balance.  All the money you’ve put into your account is tax-free, and can be used for qualifying expenses.  But if you don’t incur the qualifying expense before the end of the year, you’ll lose the remaining balance.  Check your balance right now, then plan how you’ll spend that money.  (some ideas: get your eyes checked, get your teeth checked, get an end-of-year physical, stock up on over-the-counter medicines.)

Make an extra mortgage payment
Mortgage interest is significant.  In the early years of a mortgage, most of the monthly payment is interest.  And all of that interest is deductible.  If you have a home mortgage, the interest you pay can be itemized and help get your over the standard deduction.  So if you make January’s payment a few days early, before the end of the year, you can count that interest too.  Of course, the following year you’ll only have eleven payments, unless you try the same trick next December, as well.

We have to pay taxes in this country, but we don’t have to overlook legitimate tax reduction strategies.  Make sure you finish the year out right!

This column originally appeared in the December 17, 2008, edition of the Greenhorn Valley View.
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One Response to tax reduction strategies

  1. Kip says:

    Speaking of taxes… Having just bought a house, I was rather excited about the $7500 first time home owner “tax credit”… until I found out it was really a loan (interest free) from the federal government. Starting two years from now we need to pay $500 extra in taxes for 15 years to pay the credit back; and if we sell our house before those 15 years are up, the balance of the loan is due.

    Finding out this is really an interest free loan and not a credit has made me want to take it and put it in an account to earn interest… but I’m afraid to spend it; for fear we might want to sell our house at some point and then have a big bill to pay the government. I wonder how many people are going to get stuck by the fine print on this “tax credit”? What do you think new homeowners who are not planning to stay in their new home for 15 years should do with this money?

    This might make for an interesting column topic…

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