For many, mid-November through New Year's Day is a blur of activity when important tasks get ignored. Who has time to review their benefits and tax paperwork when holiday planning looms overhead?
But what if spending a few minutes on such mundane tasks could shave hundreds of dollars off your taxes? Here are a few suggestions:
Review 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. Most people can contribute up to $16,500 in 2010, plus an additional $5,500 if they're over 50.
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 at www.dinkytown.com can help estimate the impact on your taxes.
Note: The maximum 2010 contribution to a regular or Roth IRA is $5,000 ($6,000 for those 50 and older), but you have until April 15, 2011.
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 copayments, deductibles and medical devices (e.g., glasses, contact lenses, braces); however, effective January 1, 2011, over-the-counter medicines will only be eligible with a doctor's prescription (an exception is made for insulin), so you may want to stock up now. Read IRS Publication 502 for a complete list of allowable and non-allowable expenses at www.irs.gov.
Charitable contributions. If you itemize deductions this year, charitable contributions made to IRS-approved organizations by December 31, 2010, 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 2010 taxes even further, consider moving up donations you would have made in 2011.
Energy tax credits. Allowable tax credits for certain energy-efficient improvements to principal residences will be reduced after December 31, 2010, unless Congress votes to extend 2010 levels. Until then, you can claim a tax credit for 30 percent of the total cost of eligible products purchased in 2009 and 2010, up to a maximum combined credit of $1,500 per household.
Eligible products include: biomass stoves; heating, ventilating and air conditioning (HVAC) systems; insulation; roofs (metal and asphalt); windows and doors; and non-solar water heaters. Carefully review the Energy Star website (www.energystar.gov/taxcredits) to make sure your purchases qualify.
Gifts. You're allowed to bestow a total of $1 million in gifts 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 of up to $13,000 per year, per person. (Married couples filing jointly can give $26,000 per recipient.) Rules for gift and estate taxes are complex, so read IRS Publication 950 and consult your financial advisor.