Don't Mess With Taxes

Welcome to Don't Mess With Taxes' fourth annual Year-end Money Moves series.

Each December, I look at things you can do in the closing days of the year to save you some money.

Naturally, I always start off with everybody's favorite topic, taxes!

The rest of the week, tips will be posted on investment, retirement and charitable giving moves. And we'll finish things up with a look some financial housekeeping details.

Since life, financial or otherwise, never stays within nice little boundaries, you'll note that many of the various strategies cross boundaries.

Selling assets that have lost value, for example, could help lower your tax bill, but info on that will show up in the retirement tips. The same goes for tax-saving charitable donations that will be detailed in the charity year-end tips.

But today it's taxes. Here goes.

Do a draft tax return
You don't have to sit down now amidst all the holiday chaos and fill in every line of your 2010 Form 1040. But at least do a down-and-dirty analysis of what your upcoming tax return might look like before the end of the year. It could reveal some tax areas that you need to take care of by Dec. 31.

Note, for example, how much income you have, any you might get before 2010 ends and the types of income. If you're expecting a big investment payout, there are things you can do to lessen that tax bite. And you'll want to check back tomorrow for the investment tips in this area!

Examine your deductions
Your draft tax form will be particularly helpful in analyzing your deductions and the best way to claim them.

Are you thinking of itemizing? Do you have enough to warrant filing a Schedule A?

If your itemized expenses aren't even close to the standard amount, then you'll know you don't have to worry about that this year.

But if you're just a few dollars away from making itemizing worthwhile, you still have time to bump of your allowable deductions.

Do a similar analysis with your medical and miscellaneous expenses. Each has an adjusted gross income (AGI) threshold you must meet -- 7.5 percent for medical, 2 percent for miscellaneous -- before these expenses are of any tax deduction value to you. 

Look for home-related tax breaks
Homeowners have a couple of options at the end of a tax year to help them maximize deductions.

You can pay your mortgage amount that's due Jan. 1 in December and write off the interest amount included there on your Schedule A.

Similarly, by paying your real property taxes this month, you can claim that amount as an itemized deduction. Even if you claim the standard deduction, early property tax payments could pay off. You can still add up to $500 of your property tax payment ($1,000 if you're married filing jointly) to your standard deduction amount.

True, by making these payments early you'll lose them as deductions next year. But your mock return should help you determine whether they'll be of more value to you now rather than later.

Prepay college costs
Are you a student or paying the costs of one? Consider paying tuition now for classes that begin by at least sometime in March. By doing so, you can claim them on your 2010 tax return.

Don't forget the American Opportunity Credit. Through the end of 2010, it replaces the Hope Credit and in a much more tax advantageous way for most filers.

The American Opportunity Credit applies to costs for the first four years of higher education and is worth up to $2,500. Even better, a portion of the credit is refundable, meaning even if you don't owe the IRS anything you could get some cash back.

Do an AMT analysis
Congress promises that it's going to pass a patch to the alternative minimum tax, or AMT, so that millions won't fall into its clutches. I suspect lawmakers will make good on their word (this time). But keep an eye on the legislation just in case.

Even after the amount of money that will trigger this costly parallel tax is bumped up, some folks will find they face it. The major problem then is that many common deductions claimed under the regular tax system aren't allowed under AMT calculations.

Your mock tax return will help you find if you're a possible AMT victim. If you are, then you'll know not to waste claiming deductions that won't do you any good.

Spend your medical FSA money
If you have any money left in your workplace medical flexible spending account, or FSA, use it up by the end of the benefits year. If you don't, you'll lose it.

Some companies offer FSA owners a grace period to March 15 of the next year to spend down the account. If yours does, great. If not, find ways to spend your FSA now.

Make your home more energy efficient
You only have a few more weeks to make relatively simple upgrades to your home that could pay off not only in energy savings year-round, but as a $1,500 tax credit when you file your return.

This tax benefit was enhanced by the 2009 stimulus, but it's set to expire on Dec. 31. If you need things like storm windows or added insulation to make it through this winter, get them installed ASAP so you can get the energy-efficient home improvements tax break, too.

I hope many of these tax tips apply to your personal tax situation and can help keep a few more dollars out of Uncle Sam's hand this coming filing season.

I'll see you again tomorrow for more of the ol' blog's year-end 2010 money moves.

Related posts:

• Tax moves to make in December
• Midyear Tax Moves 2010
• Just past midyear tax moves
• Weekly Tax Tips for 2010
• Year-round tax moves
• 10 tax tips for 10-10-10
• Year-end tax moves time
• Business tax moves to make by year-end

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