The tax you pay next year on 2004 income isn't set in stone.
The Early Show's resident financial adviser Ray Martin says there's plenty you can do before the year is out to help you save on that tax tab.
"Play this right by making a few smart financial moves before the end of the year,"Martin recommends, "and what you do now can amount to considerable savings at tax time."
There's no one thing everyone can do to save money on taxes. Because everyone earns money differently and has money invested and saved in different ways, there isn't a catch-all tax-saving strategy. But Martin has a variety of tips, and at least a few of them should apply to every taxpayer.
SPEND FLEXIBLE SPENDING ACCOUNTS
Check the remaining balance in your accounts. Remember, if you don't spend this money by year-end, you lose it. Poof. Gone. You need to incur qualifying expenses before Dec. 31. However, you don't need to submit the receipts for these expenses before that date. You can be reimbursed next year. Now that over-the-counter medicines such as cough syrup, aspirin and more are qualifying expenses, spending the rest of the money in your account should not be difficult.
MAX OUT RETIREMENT CONTRIBUTIONS
Make sure you are on track to make your maximum pre-tax contributions to your company's retirement plan. Here is a reminder of how much you can put into 401(k)/403(b)/457 plans:
Max-contribution = $13,000
Age 50 and over = $16,000
If you are not on track to meet these limits, you still have time to change the contribution level in your remaining paychecks.
MINIMIZE CAPITAL GAINS
Earning money when you sell your investments is a good thing, but these gains will count as taxable income on your tax returns. So, to counter this, take advantage of any "unrealized losses." In other words, if you sell a stock that has lost money this year, you can claim it as a loss and help offset the gains on your tax return. Don't forget, if you sold any real estate this year, money made on that investment also counts as a capital gain.
PLAN STOCK OPTION EXERCISES
Along the same lines, think carefully about exercising stock options. Any gains on this stock also count as taxable income on your returns. You may want to consider delaying the exercise of nonqualified stock options until after year-end.
Chances are you already consider some tax deductions - such as mortgage/interest payments, education expenses, etc - when thinking about your tax bill. There is a handful of new deductions out there you should know about before the end of the year, because they may influence how you decide to spend money between now and Dec. 31.
SALES TAX DEDUCTION
Taxpayers who itemize deductions can deduct their state income taxes on their federal return. This year, they can chose to claim a deduction for all of the sales taxes they paid in 2004 instead of deducting the state income tax. Sounds a little nutty, but it's true. This is an obvious help for the citizens in nine states who don't have state income tax. But even if you do pay a state income tax, don't assume you paid more in income taxes than sales taxes. If you bought a new car or boat, or remodeled your kitchen, for example, you probably paid a pretty penny in sales tax. If you're planning to remodel your kitchen next year and buy a new car in December, you may want to wait until January to buy the car — making all of your big purchases in the same year could save you money on your taxes.
CLEAN-FUEL VEHICLE DEDUCTION
You can now claim a deduction if you buy certain vehicles categorized by the IRS as clean-burning fuel vehicles — those that combine an electric motor with a gas-powered engine, such as the Toyota Prius, Honda Insight and Honda Civic Hybrid. This is a one-time deduction, capped at $2,000.
BUSINESS PROPERTY DEDUCTION
This is the deduction that business owners and the self-employed can take for things such as computers, office furniture, etc. (formally called Section 179). The limit was kicked up a bit from $100,000 to $102,000. The cost of an SUV used for business purposes can be part of this deduction; however, the amount of money you can claim has gone down significantly. If you bought the SUV before Oct. 22, you can claim $100,000; if you bought it after this date, you can only claim $25,000.
IF YOU'RE SELF-EMPLOYED:
There are 23 million small businesses in the United States, and many of those people are in business for themselves. Because the self-employed have a great deal of flexibility over the timing of their income and expenses, Martin recommends they follow these strategies: