Tax time is officially upon us with the last bit of 1099s being mailed last week. Even in biblical times, taxes were a part of life. Now instead of Matthew being a tax collector, we have the IRS as our tax collector. However, we are very fortunate that we can actually do some tax planning. With that in mind, we cannot do anything else to help our taxes for 2011 except IRA contributions. So, here are the top 5 ways that you can help reduce your taxes for this year in 2012.
1. Feed Your IRAs
Contributions to traditional IRAs are useful tools for retirement as well as tax planning. Because you are not required to itemize to receive the income tax benefit, your taxable income is reduced by how much you contribute. For those under age 50, you can contribute up to $5,000 to a traditional IRA this year, and for those age 50 and older, that amount is $6,000 due to the catch-up provision.
2. “Flex” Your Spending
Many people have access to flexible spending accounts through their employer, so why not use them. These types of accounts allow for pre-tax spending on dependent care and medical expenses. So, at the end of the year your W-2 shows less income because your flexible spending account reduces your taxable income. It is done through your paycheck, so each month of pay period, there is an equal amount deducted based upon your annual election for expenses. Be aware that if all the funds in the flexible spending account are not used by the end of the year, you lose it.
3. Give Back
Charitable contributions not only give you the satisfaction of doing the right thing, but they also provide a wonderful tax planning tool. Any money that you give to charitable organizations such as your church, Salvation Army, etc. can be written off your taxes as long as you itemize your deductions. This means that your itemized deductions must exceed your standard deduction allowed before you can take advantage of these charitable donations.
4. Bundle Contributions
For the charitable giver that may not have enough donations to exceed the standard deduction, bundling contributions is a great way to exceed the standard deduction and take advantage of all your donations. For example in 2012, we get to the end of this year and you have donated each month to your church, but it doesn’t exceed the standard deduction. Take what you would normally donate monthly in 2013 and donate that in the 2012 to get above the standard deduction. This way smaller deductions like donating clothes to Good Will or something can now make it onto your tax return.
5. Buy Stuff (but Only When You Need It)
For years, business owners would buy more supplies than normal at the end of a tax year to take advantage of the write-offs now versus next year. This is a very good time-tested strategy. However, keep in mind that buying for the sake of buying does not achieve the ultimate goal. Only buy what you need or will need in the foreseeable future.
FSAs are a great way to avoid the Alternative Minimum Tax as well. Since your W2 shows less income, you have less exposure to triggering the AMT!
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