End of the Year Tax Planning: Piling on the Deductions

Don't pay more than you have to in taxes; look for year-end deductions.

I have no problem paying taxes (what the money is used for is the subject for another day), but that doesn't mean I'm going to pay more?than I have to. Indeed, this is the time of year that I start casting about, looking for ways to pile on the deductions. After all, with my husband starting work as a college professor, and an increase in the income from my home business, we are doing what we can to stay in our comfortable tax bracket for a little while longer.

This doesn't mean that we mis-represent our income to the IRS. Far from it. Instead, we look for ways to minimize our income, legally, with the help of tax deductions.

What is a Tax Deduction?

A tax deduction is something that reduces your taxable income. There are “above the line” deductions, which reduce your income and help you figure out your adjusted gross income (AGI). “Below the line” deductions are those that start from your AGI and reduce your income to help you arrive at what is considered your “taxable” income. Your taxable income might be tens of thousands of dollars lower than your actual income.

A tax deduction is less valuable than a tax credit, though. A tax deduction lowers the amount of income you are taxed on. A tax credit acts like a gift card, directly reducing, dollar for dollar, the amount you owe in taxes. Tax deductions are useful, though, since they do reduce the amount of your income that you are required to pay taxes on. And, if you plan properly, can help keep you in a lower marginal tax bracket.

Tax Deductions to Consider at Year End

The mortgage interest that you pay all year is, of course, tax-deductible. However, it's not really something you can easily ramp up to further reduce your income at the end of the year. If you are concerned about your income, now is a great time to pile on the deductions. You can receive tax deductions for:

  • Charitable contributions: Make an end-of-the-year donation to your church, or to some other tax-exempt charitable organization. If you don't have the cash, but still want a deduction, you can actually get a tax deduction for the value of goods donated. I don't normally get a receipt for donations of goods, but this year I'm seriously considering going through my closet and emptying out a few bins, and getting the receipt.
  • Retirement account contributions: If you have maxed out your traditional 401k or your traditional IRA, consider making an extra contribution. You'll be better funding your retirement, and increasing your tax efficiency for this year. You can wait on the IRA if you want; you have until April 15th of the following year to make contributions. So you can hold off and see if it will benefit you as you prepare your taxes.
  • HSA contributions: If you have a Health Savings Account (HSA), and haven't maxed out your contributions, put a little more in there. I plan to contribute a couple thousand dollars more to my HSA for 2011 (as with an IRA, you have until April 15th of the following year to make contributions).
  • Investment losses: Did you lose some money in investments this year? If so, you can “harvest” the losses and deduct them. First, use them to offset any capital gains. Next, you can offset up to $3,000 of your other income with investment losses. As long as you pay attention to the IRS wash sale rule, you shouldn't have a problem.
  • Business deductions: If you have been waiting to buy new office equipment, now is a good time to go for it. There are a number of business tax deductions that you can take to help you reduce your income.

Bottom Line

It doesn't hurt to take a preliminary look at your taxes right now. Go ahead. Check your situation. It helps to know where you're at. Determine whether or not a little more spending now — on the right things — can help you more in the long run. This is of especial concern if you are worried about what happens if you end up in a higher tax bracket due to increased earnings. The right tax deductions can help you a little less this year.

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2 thoughts on “End of the Year Tax Planning: Piling on the Deductions”

  1. I think for as long as you are doing your taxes correctly, you should also always look for ways on how to reduce your taxes legally. You don’t want to pay too much. You are just maximizing on the opportunity given to you to help you save extra money for next year/months.

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