Last-Minute Deductions for 2011
The end of the 2011 is just around the corner, but there’s still time to save on your taxes. I have compiled a list of payments you can make this December to increase your 2011 tax refund or reduce your 2011 federal, and perhaps state, income tax liability.
A few things to keep in mind: You can use a bank credit card to buy deductible items in December and be able to deduct them on Schedule A. Also, the first seven items apply only if you will be itemizing deductions for 2011, so make sure you will be able to itemize before making any payments.
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Cram in Medical Appointments
Time to cram in those trips to the doctor. The Internal Revenue Service lets you deduct your yearly medical costs as long as they exceed 7.5% of your 2011 adjustable gross income – a high percentage, but one you can meet by refilling your prescriptions, scheduling check-ups, eye exams and doctor visits, stocking up on deductible medical supplies and paying any outstanding medical bills this December. Also, don’t forget to keep track of your round-trip mileage when driving to medical appointments.
Do you make direct monthly payments of health insurance premiums, or is your long-term care insurance up for renewal next month? A good tip is to make the January payment in December.
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Make a State/Local Income Tax Payment Early
Are you making quarterly state estimated tax payments, deducting state and local income tax and not state and local sales tax? If so, make the fourth-quarter payment that is due Jan. 16 in December.
If you expect to have a balance due on your 2011 state income tax return, you can ask your employer to increase your state income tax withholding.
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Buy a Car Now (And Save the Receipt)
If you make the decision to deduct state and local sales tax instead of state and local income tax, or if your state does not have an income tax and you were planning to buy a new car, truck or motorcycle in early 2012, make the purchase in December. In fact, you may actually save money on a year-end deal.
Many taxpayers do as I recommend and save all of their sales tax receipts during the year to see if it would be worthwhile to deduct actual state and local sales tax instead of using the Optional State and Local Sales Tax Table. If you will be deducting state and local sales tax, and the total tax from your accumulated bills will exceed the amount allowed in the table (you can use the Sales Tax Calculator tool on the IRS Web site), buy big-ticket items that are scheduled for purchase in early 2012 before the end of December.
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Pay Real Estate Taxes Early
In some states, real estate taxes are billed once a year, with perhaps separate billings for municipal, county and school taxes. In others, inlcuding my home state of New Jersey, the taxes are combined but you are billed quarterly.
Make payments due early in 2012 before the end of December. In New Jersey, the first-quarter payment for the year is due Feb. 1, so I tell clients to send their check before Christmas.
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Pay Mortgage Interest Early
In most cases your monthly mortgage and/or home equity loan payments are due during the first week of the month. Make the January payment(s) before the end of the month and make sure the bank or mortgage company gets the payment in December so the additional interest payment will be reflected on your 2011 Form 1098.
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Make Some Charitable Contributions
Doing good can be good for your wallet, too, since you can write off your charitable contributions. Add your favorite church and charities to your Christmas gift list and donate used clothes, books and household items to the Salvation Army, Goodwill or a similar organization. Just be sure you make a list of the items you are donating and get a receipt from each organization you give to.
Don’t have the cash available to make the contribution? You can donate stock or mutual fund shares that have appreciated in value to a church and charity and claim a deduction for the fair market value of the investment on the date of the contribution. Keep in mind that you don’t have to report the capital gain as income on your tax return, and be sure not to contribute an investment that is worth less than when you paid for it.
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Buy Some Work Essentials
Business owners aren’t the only ones who can deduct work-related expenses – employees can, too, if the expenses exceed more than 2% of their adjusted gross income.
Buy uniforms (or have your existing uniforms dry-cleaned) and deductible work clothes, small tools and supplies now; attend a work-related conference, seminar or workshop; and renew subscriptions to job-related and investment publications that will expire early next year. If your annual safe-deposit box fee is due in January, pay it in December. Also, if you use tax software to prepare your returns (not that I recommend doing this), buy the updated package before year-end.
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Prepay 2012 College Tuition and Fees
If you’re paying for college tuition for yourself, your spouse or your dependent child, you may be eligible for a tax credit or deduction. Such expenses qualify in the year actually paid, and you can use payments made in 2011 for education that will begin during the first three months of 2012 to determine the amount of the deduction or credit.
If you have not made enough qualified payments in 2011 to claim the maximum deduction or credit allowed for your level of income, you can send the college a check for the first semester of 2012 in December.
For detailed information on education tax benefits, check out the MainStreet Guide to College & Taxes.
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Make Your Home More Efficient
Have you taken steps to make your home green? If so, this credit is for you. The IRS considers qualified energy-efficiency improvements to be insulation, energy-efficient exterior windows and doors and certain roofs, though the cost of installing these items does not count and the deduction for windows is limited to $200. The credit also applies to the cost, including installation, of residential energy property such as high-efficiency heating and air conditioning systems.
If you haven’t already claimed at least $500 in energy tax credits on prior years’ tax returns, you can claim a credit of 10% of the cost of qualified energy-efficient purchases and improvements to your principal personal residence. The maximum credit is $500.
Also important: When buying, be sure to get a “Manufacturer’s Certification” from the seller.
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Make Needed Repairs to Income Properties
If you own rental real estate, such as a two-family home or vacation property, make needed repairs, buy supplies and make payments for the property this month and fill up the oil tank before year-end. You can also prepay real estate taxes, utility bills, insurance premiums and any January 2012 mortgage payment.
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