The hustle and bustle of the holiday season has most people thinking only of holiday gatherings, parties, and gift giving. Add children to the mix, and schedules get even more hectic.
Amid all the celebrations, a very important deadline - December 31 - can easily slide by, and suddenly it’s too late to do anything about reducing next year’s taxes.
With winter days ahead, now is the perfect time to sit down with your financial advisor and discuss strategies for reducing your tax bill. While each person’s situation is unique, certain hard and fast rules apply to most of us:
- Make a deposit to your retirement plan, regardless of whether you set up a regular payment schedule or make one lump deposit at the end of the year. Make sure you have contributed as much as you are allowed for your plan. This will reduce your income for the year.
- Make charitable contributions. Any charitable contributions made before Dec. 31 are deductible. Don’t forget to get a receipt for anything worth more than $250. And if you are unsure about the value of the goods you are donating, try ItsDeductible (www.itsdeductible.com). This software program by Turbo Tax will value your donations so you get the most value for tax deductions.
Another smart idea when making charitable contributions is to contribute appreciated shares of publicly traded stock instead of cash. The reason for this is that selling the stocks first and donating the proceeds requires that you also pay capital gains taxes.
- Spend now, earn later. That’s right - to make as many expenditures as possible eligible for the 2007 tax year, pay January’s mortgage payment and real estate taxes in December. For medical expenses, which must amount to 7.5 percent of your adjusted gross income to be itemized, squeeze elective procedures in before Dec. 31.
- Refinance before Jan. 1. This tactic is particularly worthwhile if you have refinanced in the past. Any points you pay to your lender may be spread over the life of the loan, resulting in a modest annual savings on your taxes. Points paid on your first refinance that haven’t been written off can be deducted all at once.
These are just a few strategies that can save you thousands of dollars. But to get the most savings on your tax bill, nothing beats consulting with a professional. Remember this holiday season, in the midst of all the celebration, set aside a few moments for end-of-year tax planning. Come April 15, you will be glad you did!
Katherine B. Paal, MBA, CFP, RFC, CTFA
Ms. Paal specializes in the financial needs of dentists and physicians. She is a certified financial planner at Heritage Financial Consultants in Hunt Valley, Md., and is an investment advisor representative, registered representative, and licensed insurance broker with Lincoln Financial Advisors Corporation, a registered investment advisor and broker-dealer [(410) 771-5655]. E-mail Kathy at [email protected].