Tax Planning: 5 Things to Do Before the End of the Year

Photo: Devonyu

It’s that time of year again: Leaves are falling, the holidays are here, and people are doing their tax planning. If you’re not sure exactly what “tax planning” entails, don’t worry. You’re not alone! Being savvy about your taxes, however, is not as complicated as it seems. Federal and state income taxes are based on your taxable income — that is, the amount you earn minus any deductions. Tax planning involves managing your taxable income, either by deferring income to another year, recognizing income sooner, or increasing deductions. Below are some tax-planning strategies you might want to consider before the end of the year.

Take advantage of the energy-efficient home-improvement credit

Homeowners who buy products that increase the efficiency of their home's energy use like insulation, heating and cooling equipment, roofs, and energy-efficient windows are eligible for a tax credit of 30% of the cost, up to $1,500. Homeowners are also eligible for a tax credit of 30% (no upper limit) on large energy-efficiency changes, including geothermal heat pumps, residential wind turbines, and solar energy systems. You can view a full list of energy efficiency tax credits available to consumers at’s Federal Tax Credits for Energy Efficiency page. Consumers who make energy-efficient home improvements also qualify for utility or state rebates, in addition to state tax incentives. Find details on tax incentives by state at the Database of State Incentives for Renewables and Efficiency (DSIRE).

Donate to charity

Not only does giving money warm your soul; it can also qualify as a tax deduction that can lower your taxable income. If you itemize deductions on your taxes, you can claim a tax deduction for gifts to qualified non-profit organizations. A qualified non-profit is one that is designated as a 501(c)(3) by the IRS. Examples of qualifying non-profits include the Red Cross or Salvation Army, your local humane society, schools, churches, and alumni associations. Tax deductions cannot be claimed for gifts to foreign charitable organizations (unless they are registered in the U.S.), some private institutions, or individuals. Something important to keep in mind when claiming a charitable deduction: You must have a receipt or written confirmation of your donation. If you drop money into the Salvation Army’s red bucket around Christmastime, or give cash to your church’s offering plate, those cannot be claimed as donations. Lastly, if you have ever donated to a charitable organization via text message (think the Red Cross’s text message campaign for relief for victims of the earthquake in Haiti), your phone bill serves as your receipt for the donation.

Sell investments (if you’ll have capital gains)

In simplistic terms, a capital gains tax is a tax that people must pay when they sell an asset for more than the purchase price (plus improvements). For tax years 2008 — 2010, people in the 10% and 15% tax brackets won’t pay any taxes on gains from eligible dividends and on some capital gains, while everyone else will pay a 15% tax. Those capital gains tax rates are set to expire at the end of 2010, however, meaning that capital gains will increase from 0% to 10% for those in the lowest bracket, and the new rate will be 20% for everyone else. Selling this year isn’t for everyone, though — if you have an asset that is expected to appreciate significantly, it might make sense to hold onto it and pay the higher capital gains tax.

Spend the rest of the money in your Flexible Savings Account

If you participate in a flexible spending account (FSA) for healthcare or dependent care expenses, make sure you are on track to use up all the money you’ve set aside before the end of the year. If you still have quite a bit left in your account, check with your employer. In many cases, employees are allowed to incur expenses past the end of the year. If not, schedule doctor’s appointments, buy those glasses, and stock up on qualifying medicine. And speaking of medicine, FSA participants will no longer be able to claim reimbursement for over-the-counter (OTC) drugs after 2010. One way to get around this next year is to have your doctor write you a prescription for OTC medication you genuinely need — it will be reimbursed if accompanied by a prescription.

Seek the advice of a professional

Consulting with a skilled tax preparer or Certified Public Account is always good advice, and never more so than in the present. Although we can’t be sure exactly what tax provisions will change in the coming year, tax professionals are paid to stay current on the issues and be familiar with upcoming legislation. Be sure to find a tax professional who you trust and can advise you on the best way to manage your tax situation at the end of the year.

What do you think — are these sound tax-planning moves to make before the New Year? Do you have any to add? Share your thoughts!

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