As hectic as life is at this time of year, if you can spare a few minutes I have a few suggestions that could save you a lot of money if you act quickly before the 2006 tax year ends.
Beef up your 401(k). If you haven’t already contributed the maximum to your 401(k), 403(b) or 457 plan – or at least enough to take advantage of any employer-matching contributions – ask your Human Resources department if you can increase your deduction from December’s paycheck. Not only is this a great gift for your financial future, but it can reduce your taxable income – and therefore, your taxes. The same strategy works for Individual Retirement Accounts if your employer doesn’t offer a 401(k) plan, although you have until April 16, 2007, to open an IRA for tax advantages in 2006.
Deplete your Flexible Spending Account balance. If you have a health care flexible spending account through your employer, be sure to spend your 2006 balance by your employer’s deadline; otherwise the IRS’ “Use it or lose it rule” may kick in. Consider qualified expenses you can make before the end of the year: Do any family members need new eye glasses, braces or other dental work over your plan’s limits, or over-the-counter medicines you can stock up on? Check IRS Publication 502 for a complete list of allowable expenses (www.irs.gov/pub/irs-pdf/p502.pdf). Please note: IRS rules say you can’t submit bills to your dependent care flexible spending account until after the date of service so prepaying 2007 expenses isn’t an option.
Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc., features detailed information on 401(k) plans and flexible spending accounts (www.practicalmoneyskills.com/401k).
Prepay property taxes. If you’re a homeowner and itemize deductions, you can increase your 2006 deductions by prepaying your 2007 property taxes before year-end. If deductions for your property taxes are included in your mortgage payment, check with your lender to determine if this is feasible.
Prepay your mortgage. Another way for homeowners to increase 2006 deductions is to make your January 2007 mortgage payment this month. This is especially effective if your mortgage is relatively new, since the bulk of your monthly payment is likely tax-deductible interest. Again, check with your lender to see how this might work for you.
Charitable contributions. If you itemize deductions, most charitable contributions are tax-deductible. Just be sure to make your contribution by December 31. Keep in mind that beginning in 2007, you must obtain a receipt for all charitable contributions, including small cash donations (like at the church collection plate); also, only donated items in good condition will be deductible.
Financial gift strategy. By law, you may make financial gifts up to $12,000 per person, per year, without impacting any estate taxes in effect when you die. So if you’re planning to leave money to your children, family members or anyone else and can spare the cash right now, this is a good way to avoid estate taxes later on. Check with your financial advisor for details.
This isn’t a great time of year to take on any additional tasks, but if some or all of these situations apply, you could save hundreds of dollars on your taxes – and wouldn’t that be a great way to start the New Year?
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