December is the year's busiest month for many people, with holiday-related shopping, socializing and travel cutting into already hectic schedules. It will be tough, but try to set aside some time before year's end to consider taking a few actions that could seriously lower your 2008 tax bill.
Maximize tax-deferred retirement savings. December 31 is the 2008 contribution deadline for employer-sponsored 401(k), 403(b) or 457 plans. Remember, pretax contributions can lower your taxable income and thereby lower your federal and state income tax bills.
And, if your employer matches a portion of your contributions (a common match is 50 percent on the first 6 percent of income saved) and you don't contribute at least that amount, you could be forfeiting hundreds – or thousands – of dollars in free money. Ask your Benefits department if you can increase your December paycheck deduction to boost your 2008 contribution.
The same strategy for reducing taxable income also works for Individual Retirement Accounts (IRAs), although you have until April 15, 2009, to open or contribute to an IRA for 2008 tax advantages.
Use up Flexible Spending Account (FSA) balances. If you participate in employer-sponsored health care or dependent care FSAs that use pretax dollars to pay for expenses, timing is important: You must spend your account balances before your employer's deadline (sometimes up to 75 days into the following year) or you'll forfeit the balances. Double-check the deadline with your Benefits department.
If there's money left in your Health Care FSA, consider qualified purchases you could make before the deadline, such as eye glasses, contact lenses, braces, or over-the-counter medicines. IRS Publication 502 provides a complete list of allowable expenses (www.irs.gov). If you've already exhausted your 2008 FSA account balances, think about which elective expenses you could postpone until early 2009.
To learn more about 401(k) plans and FSAs, visit Practical Money Skills for Life, Visa's free personal financial management site (www.practicalmoneyskills.com/benefits).
Charitable contributions. If you itemize deductions on your federal income tax, most charitable contributions made to IRS-qualified, tax-exempt organizations by December 31 are tax-deductible. (See Publication 78 at www.irs.gov for a complete list.) Remember, you need to obtain receipts for all contributions, including small cash donations, and only donated items in good condition are deductible.
Financial gift strategy. By law, you may make financial gifts up to $12,000 ($24,000 if married and making joint gifts) 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.
Prepay property taxes. Homeowners who itemize deductions can increase their 2008 deductions by prepaying 2009 property taxes before December 31, 2008. If property taxes are included in your monthly mortgage payment, ask your lender to determine if this is feasible.
Prepay your mortgage. Another way to increase 2008 deductions is to pay your January 2009 mortgage amount this month. This is especially effective for relatively new mortgages where the bulk of the monthly payment is tax-deductible interest. Again, ask your lender how this might work for you.
By taking a few minutes out of your busy schedule now, you can potentially save a bundle on your 2008 taxes. You'll thank yourself come April 15.