A lot of people don’t think of tax time ’till April. But if you want to lower your 2010 tax bill, and keep Uncle Sam off your back, the time to act is now. Before Dec. 31, you can make adjustments to the things you buy, sell and invest in to lower your tax burden and reduce your bill. Here are 9 tips that could help the most:
1. Get Your House in Order. Before you determine what changes you can make to reduce your tax burden, you’ll need to know what you’re working with. That will mean making a tally of everything you earned, saved, invested and spent in 2010. You can do it on a piece of paper or an Excel spreadsheet, or you can buy software like TurboTax or Quicken to help you.
2. Spend. If you have a flexible spending account (FSA) through which your employer deducts pre-tax money from your paycheck for medical and other needs, make sure you spend it all before Jan. 1 to avoid any risk of losing it. This might mean making an appointment with a doctor, refilling prescriptions or extending a contract for in-home care.
3. Donate. Once you know how much you earned for 2010, you’ll know which tax bracket you fit into. From there, you can investigate ways to fit into cheaper brackets. One way is to donate money to charity. Each person can donate up to $13,000 a year without paying gift taxes, according to the IRS (check out the special category for donations to whaling captains!). If you’re married, you and your spouse can give a total of $26,000. All donations must be made by Dec. 31.
4. Invest. Make sure you’ve given the maximum amount possible to your retirement plans. You can give up to $16,500 to your 401(k), or $22,000 if you’re 50 or older. For IRA’s, you can give a maximum of $5,000, or $6,000 if you’re over 50. Simple IRA’s are capped at $11,500, or $14,000 if you’re age 50 or above. And for 403(b)’s, you can contribute up to $16,500, or $22,000 if you’re 50. Also, explore opening a college savings plan like a 529, which allows you to save for your child’s or grandchild’s college tuition while lowering your tax bill.
5. Postpone Your Pay. If you’re a contractor or freelancer, consider asking your clients to defer paying you until after the New Year. Many factors go into making this decision, including whether this year’s tax bill is too high, and whether postponing pay will leave you with an unmanageable tax bill in 2011.