Spending a few minutes on your tax situation now can help you save big come tax time. And we’ve got the tips to help reduce your taxable income.
For many, mid-November through New Year's Day is a time to focus on the holidays and family and friends, not taxes. But what if spending a few minutes on your tax situation now could save you hundreds of dollars at tax time? As you review your finances, consider taking the following steps to help lower your taxable income.
Contribute to your 401(k). If you haven't already maxed out, ask your employer if you can make a catch-up contribution to your 401(k), 403(b), or 457 plan before year's end.
If you make pretax contributions, your taxable income is reduced, which in turn lowers your taxes. Plus, if your employer offers matching contributions (essentially, free money), be sure to contribute at least enough to take full advantage of the match. The "Retirement Contribution Effects on Your Paycheck" calculator can help estimate the impact on your taxes.
Exhaust your FSA balances. If you participate in employer-sponsored health care or dependent care flexible spending accounts (FSAs), which let you use pretax dollars to pay for eligible expenses, be sure to spend the full balance before the plan-year deadline (sometimes up to 75 days into the following year); otherwise, you'll forfeit the remaining balance.
You can use your health care FSA for things like copayments, deductibles, and medical devices (e.g., glasses, contact lenses, braces). Read IRS Publication 502 for a complete list of allowable and non-allowable expenses.
Make charitable contributions. If you itemize deductions this year, charitable contributions made to IRS-approved organizations by December 31 are generally tax-deductible. (See IRS Publication 78 for a complete list of organizations.) If you've got extra cash now and want to lower your taxes even more, consider moving up donations you would have made in the new year.
Give gifts. You're limited in the dollar amount of gifts you can give during your lifetime before the federal gift tax kicks in. One way to exceed that limit—and avoid having to file a Gift Tax Return—is by giving separate, annual gifts up to the allowed amount per year, per person. Rules for gift and estate taxes are complex, so you’ll want to read IRS Publication 950 and consult your financial advisor. By taking the above steps now, you’ll be well on your way to making tax time a little less burdensome on your wallet.