6. Bunch your deductible expenses
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount.
Medical and dental expenses , for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses , which include business expense claims, must be more than 2 percent of AGI.
To get over these deduction hurdles, start consolidating eligible expenses now. This strategy, known as bunching deductions, will push them into one tax year where you can make maximum tax use of them. The sooner you start this process the better. It's much easier to plan your costs now than scramble to come up with eligible expenditures as December days fade.
7. Go shopping
A popular itemized expense is for other taxes you've paid. Most people deduct state and local income taxes on Schedule A. But if you live in a state with no income tax or your income tax rate is low, it will be more advantageous to deduct your state and local sales tax amounts.
The IRS provides tables with the average amount of state sales taxes paid in each state. A worksheet (or program in your computer tax software) also helps you figure any local sales taxes to add to the table amount.
You also can add to the average sales tax amounts any levy on the purchase or lease of a vehicle. This isn't limited to cars; you also can count sales tax on trucks, motorcycles or motor homes, as well as boats and airplanes. Keep your sales receipts, too, for a mobile or prefabricated home purchase or for material used to substantially renovate your residence. Sales taxes on these purchases also are deductible as additions to your state's average sales tax table amount.
8. Be generous to charities
As you're putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles, with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you've held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset's value at the time of gifting. Even better, you don't have to worry about capital gains taxes on the appreciation of your gift.
Older individuals get a special donation option. If you're age 70 1/2 and don't need the money that the IRS says you must take as a required minimum distribution from your traditional IRA , you can directly transfer that required minimum distribution, or RMD, to a qualified charity. There's no deduction for this trustee-to-trustee transfer, but you'll meet your RMD obligation and won't have to count the distribution as taxable income.
9. Pay college costs early
The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return.
The American Opportunity credit replaced the Hope tax credit in 2009 and is in effect through the 2017 tax year. It's worth up to $2,500 with up to 40 percent of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.
10. Adjust your withholding
Did you write the U.S. Treasury a big check in April? Or did you get a large refund from Uncle Sam instead? Neither is a particularly good financial or tax plan.
Most of us cover our eventual tax bills through payroll withholding. Ideally, you want the amount coming out of your paychecks throughout the year to be as close as possible to your final tax bill. If you have too much withheld, you'll get a refund; too little withheld will mean you'll owe taxes when you file.
You can correct the imbalance by adjusting your payroll withholding now. The correct amount taken out of your final 2013 paychecks will help ensure that you don't overpay or underpay the tax collector too much next filing season.
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