YearEndtax
Don’t wait until you’re filing your tax return to think about taxes. Spending a moment now can help you come out ahead next spring. Here are the top three things you can do now to save time and money at tax time.

1. Can you defer any income until next year (or even later)?

  • This helps you out if you expect to be in the same or lower tax rate bracket next year.
  • Almost everyone is eligible to defer income by increasing (or beginning) contributions to a retirement plan. Whether it’s a 401(k) through your employer or a traditional IRA, the impact is the same; you get to postpone paying tax on that income. If your employer offers a retirement plan and you aren’t participating yet, check to see when you can start participating. If you aren’t participating in an employer-sponsored retirement plan, a traditional IRA might be the best fit for you. If you are eligible, you can make contributions to a traditional IRA for 2013 anytime between now and April 15, 2014. The maximum deductible contribution to a traditional IRA in 2013 is $5,500 ($6,500 if you are age 50 or older).
  • There are other ways you might be able to defer tax.
    • Investors may benefit from selling stocks or other investments at a loss to offset their gains.
    • Some business owners have a couple of other options; one method of deferring income is to wait until late in the year to bill your clients. If that’s not the right solution for your business, consider whether purchasing equipment this year rather than next year makes sense.

2. Will you benefit by prepaying bills?

  • If you are among the one-third of Americans who can benefit by itemizing deductions for expenses such as home mortgage interest, real estate taxes, state income taxes, and charitable contributions, consider paying those expenses before the end of the year.
    • Making charitable contributions now is one of the easiest ways to increase your itemized deductions. Whether you are donating cash, household furnishings, or appreciated stock, this can be a tax-saving move.
  • If you are in college or have a child in college, prepaying tuition due in January might help your bottom line if it increases your allowable education credit. The American Opportunity Credit may be available with regard to qualified expenses for students in the first four years of college; the Lifetime Learning Credit may be available for the expenses of students who do not qualify for the American Opportunity Credit, such as graduate students.

3. Did you make enough payments (through withholding or estimated taxes) through the year?

  • If you had a life change during the year (for example, got married or divorced, lost a job or got a new job) you may need to update your income tax withholding or check to see whether you should make estimated payments. Your employer might have withheld too little taxes, leaving you with an unexpected balance due and possibly exposing you to penalties and interest. Do a quick check now to avoid surprises at tax time. If you have an unexpected balance due, increasing your withholding can help you cover some of the unexpected costs and may shield you from penalties and interest. And knowing what to expect helps you plan and budget for tax time.
Tax planning isn’t just for the rich and famous. You can benefit by taking a look at your income and expenses and applying these techniques to save money on taxes.