It's a shame to find out about a good tax-saving strategy in January, when it's too late to take advantage of it. That's why it's important to give some thought to your tax return for 2010 before year's end. Consider these six last-minute ways to cut your tax bill that may add some cheer to your holidays — and make April 15 worth celebrating, as well. Here's to many happy returns.
1. Itemize your clothing donations. Stuffing old clothes into a bag and dropping it off at Goodwill is certainly easier, but preparing a detailed list of donated items can result in a more generous tax deduction. A detailed list also comes in handy in the event of an IRS audit. You should indicate the fair market value of the clothing, as well as any donated furniture or other personal property, and note the condition. Expensive donated items might require an appraisal to support the declared value.
2. Donate appreciated securities. Thanks to strong gains in the stock market since early 2009, you may have some stocks, mutual funds or other investments with sizable capital gains. Appreciated securities make ideal donations because you don't have to pay capital gains taxes, yet the total value of the donated securities qualifies for a deduction. Your charity of choice can provide you with the information necessary to transfer securities from your brokerage account.
3. Make charitable contributions with a credit card. If you're short on cash in December but still want to make a charitable contribution, see if the charity will accept a donation by credit card. Many do. As long as the credit card is charged by Dec. 31, you can pay the bill in 2011 but deduct the payment on your 2010 tax return. Also, if a contribution you make by check is in the mail by the end of the year, you can take the deduction this year — even though the check doesn't clear until 2011.
4. Spend FSA money. Many employers offer flexible spending accounts (FSAs) that allow workers to put pretax dollars toward certain medical and child care expenses. Employees who don't use the money in their accounts by the end of the FSA year lose it. Some FSAs expire in December, while others expire at different times of the year. If you have an FSA, make sure you use up all the tax-advantaged benefits by the deadline.
5. Take advantage of education tax credits. The enhanced American Opportunity Credit for undergraduates expires at the end of 2010. Qualifying individuals who pay at least $4,000 in college tuition in 2010 can claim a tax credit of up to $2,500. If you haven't spent enough to take advantage of the full credit, pay your student's 2011 tuition bill in advance by the end of December.
6. Set up a self-employed retirement plan. If you or a family member has any income from either full- or part-time self-employment, the best and most flexible self-employed retirement savings plan is the so-called solo 401(k). Many brokerage firms and mutual fund companies offer these plans at no cost, but the plan must be set up by Dec. 31. You don't have to make a contribution until your tax return deadline in 2011, but you'll still qualify for a 2010 deduction.
All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser regarding your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.
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