Seven Ways to Take Control of 2008 Tax Bills
When it comes to cutting your tax bills, there's no time like the present, according to the Alabama Society of Certified Public Accountants. Here are some tax strategies to put into action now to reduce your tax bills.
1. Take retirement savings to the max.
One of the best ways to trim tax bills is to make the maximum allowable contribution to retirement savings plans. For 2008, employees can contribute up to $15,500 of pre-tax earnings to a 401(k) and the fund grows tax-deferred until withdrawn. Workers who will be at least 50 years-old by the end of the year may contribute up to an additional $5,000 per year. The IRA contribution limit for the 2008 tax year remains at its 2007 level of $4,000 ($5,000 for taxpayers who are age 50 or older).
2. Defer income.
Income not received by December 31 isn't taxed until the following year. While employees on salary don't have much of a choice regarding when they get paid, taxpayers who are self- employed or do freelance or consulting work have more flexibility. By delaying billing until late December, taxpayers can postpone the receipt of income into next year. Keep in mind that this strategy only makes sense if the taxpayer thinks he or she will be in the same or a lower tax bracket next year.
3. Pay some bills early.
By prepaying certain 2009 bills in 2008, taxpayers may be able to write off a deduction earlier. For example, when taxpayers pay January 2008 mortgage bills on or before December 31, they may deduct an extra month of interest in 2008. If it's not included, remember to add the extra month's interest amount to the amount reported by lenders on 1099 forms. Paying state income taxes or property taxes early is another way to accelerate federal deductions for 2008 if the taxpayer isn't subject to alternative minimum tax.
4. Take a loss.
If a taxpayer's portfolio experiences significant capital gains in 2008, consider whether it makes good financial sense to sell off some of the losers. Use the amount of losses to offset capital gains. And if capital losses are larger than capital gains, deduct the capital loss against other income, such as salary - up to a limit of $3,000 in one year. Any additional losses can be carried over into subsequent years, when they can be used to offset future capital gains.
5. Go green.
Consumers who purchase and install specific improvements in their principal residence, such as exterior windows and doors, insulation to walls and ceilings, high efficiency water heaters, furnaces and boilers, and central air conditioning units, can receive a tax credit of up to $500. Check with your tax professional on specific allowances for 2008.
6. Be giving.
Doing good for others can do good to tax bills. Donations made before the end of the year are a great way to cut 2008 tax bills. However, keep in mind that effective for 2008, all money contributions, regardless of the amount, require substantiation by a canceled check or a receipt from a charity. Previously, receipts were required only for contributions of $250 or more. Donate appreciated property or stock rather than cash and possibly save even more by avoiding paying capital gains taxes. Just be sure to understand the rules and give it plenty of time because it could take several weeks to transfer the stock or property.
7. Drain flexible spending accounts.
Is there money left in flexible spending accounts? While the IRS now allows companies to give their employees a two-and-one-half month grace period to spend money set aside in a flex spending account, not all businesses have adopted this extension. If there is money left that needs to be spent before Dec. 31, don't wait until the last minute.
To get more personalized tax help for your financial situation, call a CPA.