Recognizing the importance of tax planning as 2011 ends and 2012 begins, the Tax Resolution Institue offers you this handy guide of 5 essential end of the year tax planning tips. Some may apply to you and some may not, but we are certain that there is at least two or three tips in this document that will help you with your tax planning. After all, although the Tax Resolution Institute focuses on helping individual and companies resolve delinquent tax debts, we also believe in providing techniques and strategies as a form of prevention to help you avoid such serious tax problems.
1) Sell Losing Stocks By The End Of The Year To Offset Capital Gains
One strategy you can use to reduce your taxes is to examine your investment portfolio and make sure to offset any capital gains by selling the stocks with capital losses. Capital losses offset capital gains in the year that the investments are sold off. However, if your losses exceed your profits, then the net loss is tax deductible but only up to $3,000 in net losses for that year. Still, the remainder of those losses carry over to the subsequent year as what is described as a “Capital Loss Carryforward” by the Internal Revenue Service
In addition, you must be careful when timing the sale of any losing positions. Any purchase of “substantially identical stock or securities” (from Publication 550) within 30 days of selling a security at a loss will be deferred. The key is to sell one investment at a loss, and purchase a similar (but not “substantially identical”) investment that helps build your portfolio. Always get the advice of a tax planning professional when making such a decision.
2) Be Fully Aware Of Tax Credits You Can Use To Lower Your Tax Bill
Yes, when it comes to tax credits, it often seems that the qualifying rules for each program are both complex and overly specific. Nevertheless, you should explore any or all of the options to see if they can be used to lower your overall income tax debt for that calendar year. Here are some of the tax credits used most often:
A. Child Tax Credit + Child and Dependent Care Credit:
The child tax credit provides you with a tax credit of $1,000 per qualifying child under the age of seventeen. This credit is phased-out for taxpayers with modified adjusted gross incomes (AGI) in excess of $110,000 for married-joint filers, $55,000 for married filing separately, and $75,000 for all other taxpayers. In addition, if you’re paying someone else to care for a child under age 13 so you can work, then you may be able to claim the child and dependent care credit.
B. Hope and Lifetime Learning Credit:
If you are paying secondary education expenses, then the American Opportunity Credit, Hope Credit and Lifetime Learning Credit provide tax credits up to $2,500 for each qualifying student enrolled in a qualifying institution of higher education.
C. Helping The Environment – Hybrid Car Credit + Energy Saving Devices:
If you buy or lease a new hybrid car or truck, then you may be eligible for a tax credit of $250 to $3,400 per car depending on the fuel economy of the vehicle. New car manufacturers will provide you with the details of these tax savings programs and you can also can find them online. In addition, if you have installed some of the newer energy saving devices in your home such as air conditioners, water heaters, furnaces, boilers or solar panels, then you may be eligible for a tax credit of up to $2,000. Check with your utility company to find out which energy saving devices provide tax credits or rebates.
3) Place Funds In Your 401k Retirement Account
If you are looking to lower your tax bill, one of the most effective ways to keep more of your gross income is to have it directed into a 401k retirement account. The 401k rules are quite generous when it comes to lowering income. On a pre-tax basis you can invest up to $17,000 in 2012 (16,500 in 2011), and your contributions are often matched by your employer. Such an investment for your future security is nothing less than a win-win.
4) Please Do Not Forget Or Ignore Your Gambling Earnings And Losses
In this modern age of high-stakes poker online, in the casinos, and on television, more and more people are gambling each year with tremendous losses and some excellent earnings. Whether you play poker or back your favorite college team with a bookie, shoot craps or bet on the horses, all gambling winnings must be reported as taxable income. In addition, gambling losses may be claimed as deductions, up to the amount of your winnings. What is essential to remember is that gambling winnings and losses must be reported separately. If you file a tax return with with the IRS and do not report such figures, it is considered to be tax evasion.
5) Organize And Maintain Your Paperwork And Records
Yes, we know this seems like a hassle, but it is a necessity as well? The IRS recommends that you keep all tax-related records for 3 years in case of an audit. But some old tax documents, such as last year’s W-2’s, can come in handy when you are filling out your tax return this year.
Here are examples of tax-related documents you should organize:
- W-2 forms
- Pay stubs for the year
- Mortgage payment stubs and/or home purchase closing statement
- Receipts from anything you might claim as an itemized deduction
- Receipts from donations given to any charity, including text message donations
- Any receipts for business travel expenses + your car mileage log for business use
- Credit card statements and bank statements, including canceled checks
- Medical bills (particularly if exceeding 7.5% of your income)
- 1090G form (for deducting state or local income taxes)
- 1090 forms (from any dividends or other income paid to you)
To make your mountain of documents easier to store, try scanning them and keeping them as PDF files. This way you can print them out if you need them. If you do this, always remember to back up your computer. The IRS will not take kindly to the excuse that you scanned your financial documents and your hard drive failed. Always be careful!
That covers many of the bases for now. The Tax Resolution Institute are not only experts when it comes to tax resolution services, but we also have extensive experience in tax planning and tax prevention strategies. Contact us today for a free consultation so we can help you ensure the profitability of your financial future.
About Peter Y. Stephan
Peter Y. Stephan, executive director of the Tax Resolution Institute, has been helping people resolve large, complex payroll tax problems and personal income tax problems for over 25 years. Peter has written a book "The Ultimate Tax Resolution Guide" and speaks on Tax Resolution topics frequently.