While it may not be April 15 quite yet, it's not too early to start thinking about your income taxes. By planning ahead, you may be able to reduce the amount of money you?ll owe Uncle Sam for this year's taxes.
Sometimes, paying expenses early can help by allowing you a bigger deduction. At other times, though, deferring income or deductions until next year may be more beneficial.
Following are several commonly used tax strategies. You may be able to benefit from some of them in your year-end tax planning.
Make Your January Mortgage Payment in December
If you make your January 2007 mortgage payment by December 31, you may be able to deduct the interest portion of the payment on your 2006 return.
Use Your Credit Card To Contribute to Your Favorite Charity
Instead of waiting until early in 2007 to give to your favorite charity, find out if the organization accepts contributions on a credit card. The IRS considers the date the donation was charged to your card as the contribution date. If you charge your contribution by December 31, you?ll be able to claim the deduction on your 2006 tax return even though you won't actually pay the bill for another month or two.
Donate Items You No Longer Use to Charity
If you donate clothing, furniture, household, or other items to a charitable organization, you can deduct their fair market value on your tax return. Be sure you list items individually and get a dated receipt.
Defer Income into 2007
If you?re anticipating a 2006 bonus or expect to receive other discretionary income, ask your employer to defer payment until January if possible.
Make the Maximum Contribution to Your Retirement Account
The salary deferral contributions to your employer's retirement savings plan generally are tax deferred until you begin receiving distributions from your account. Since you don't pay any current taxes on those contributions, setting aside the maximum allowable amount can lower your tax bill. And, if you?re age 50 or older and your plan allows, you may be able to make ?catch up? contributions to your account, reducing your current tax bill even more.
Contribute to a Traditional IRA
You have until April 16, 2007, to contribute up to $4,000 to an individual retirement account ($5,000 if you?re age 50 or older). Some or all of your contribution may be tax deductible depending on your filing status and income and whether or not you or your spouse is covered by an employer's retirement plan.
Bunch or Defer Medical Expenses
If you have medical or dental procedures planned for early 2007, scheduling and paying for them in 2006 may help you exceed the 7.5% of adjusted gross income (AGI) floor for itemized medical deductions. Alternatively, if you won't exceed the floor this year but might next year, defer any expenses you can until 2007.
Bunch or Defer Miscellaneous Itemized Deductions
Prepaying 2007 investment and employee business expenses in 2006 may help you exceed the 2% of AGI floor that applies to miscellaneous itemized deductions. If you still won't exceed the floor, deferring payments until 2007 might help you to claim the deduction next year.
These are only some of the strategies you can use to reduce your tax bite. Your personal financial and tax situation will determine which strategies are appropriate for you.