7 Ways to Reduce Your Taxes This Year

There are many tools and techniques used to assist individuals in reducing their tax liability. Many of these techniques are confusing, difficult to apply or are questionable regarding their functionality. If you are interested in simple tried and true actions that are easy and effective in reducing tax liability for this year, here are seven that you should consider.

Income shifting. If possible, wait to take income, gains, distributions or profits until next year. This will reduce your total income for the current year and thereby reduce your tax liability. Some people worry about any delay, however, consider that the difference between receiving income on December 31 of one year and Jan 1st of the next, is only one day, and that one day could save you a great deal of money. This is particularly effective in the income you are shifting is unusual or extraordinary, otherwise, you’ll just shift the tax burden from one year to the next and you’ll need to be prepared to address this issue again over the next twelve months. However, perhaps you have things in the works that will offset the income next year so it won’t be an issue then either.

Prepay Expenses. If appropriate, you can prepay some deductable expenses for next year (by year end) and thereby be able to deduct those items from this year’s income and reduce your current tax liability. These items may include prepaid interest on applicable loans and investments, professional dues and subscriptions, premiums for qualified long-term care insurance coverage, property taxes, etc.

Establish and fund educational accounts. If you’ve got young children or grandchildren, you can establish and fund programs for their college funding and enjoy the deduction this year. These Section 529 plans not only grow tax free for your chosen beneficiary, they are a write off for you too.

Maximize your contributions to deductible retirement programs. Payment into traditional retirement plans like IRAs and 401Ks can reduce your taxable income by the amounts contributed and thereby reduce your tax bill by your tax bracket percentage of the amounts deposited. These must be qualified programs, whether they are private or employer sponsored.

Make desired charitable contributions by year end. By making your chosen charitable contributions by year end, you in effect get Uncle Sam to help fund your chosen charity. Since these contributions are deducted from your income prior to taxes be calculated and deducted, you effectively move money that would have gone to the Government to the coffers of a worthwhile organization or group.

Get credit where credit is due. Be sure to consider and capitalize on current credits made available. If you qualify, make sure you utilize the following credits and deductions. You’ll need to review these items with your chosen tax professional to see if and how you may be eligible.

* First-time homebuyer credit
* Child-care credit
* First-Year bonus depreciation
* Enhanced Section 179 write offs

Use losses to offset gains. If you have suffered capital losses from certain investments you may want to consider using them to offset gains in others. For example, if you have lost $1,000 on one stock and another stock has increased in value by $1,000, you could sell the first looser at a $1,000 loss, sell the winner for a $1,000 gain and then let the losses offset the gain for tax purposes. You can then invest the proceeds, including the $1,000 now tax free gain, in another investment. But what if you want to keep an investment in the same winning stock? You’ll have to wait at least 30 days to avoid the “wash-sale rule” that could disallow your loss. In these cases, the $1,000 gain will have been covered by the loss and so your basis in a new purchase would be $1,000 higher than the old shares held and you would never see a tax bill from the $1,000 gain that was sheltered by the loss.

What if you have losses that exceed gains? Good news; you can also deduct excess loss from $1,500 to $3,000, depending on your filing status. And that’s not all; you may also be able to carry forward excess losses to next year to reduce your taxes then as well.

Always talk to your professional advisors for more information, clarification and confirmation. Good luck and good savings.