It’s not too late to cut your 2006 tax bill. Prior to December 31st:
Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $15,000 into your 401(k) or 403(b) plan. Anyone 50 or older by December 31st can put away an additional $5,000. If you’re self-employed, consider setting up a Solo 401(k) by 12/31. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.
Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules.
Send in your January, 2007 mortgage payment early enough so it will be processed prior to 12/31/06. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Donâ€™t forget to get a receipt. And you should make a list of each item donated, along with its condition. Effective August 17th, only donations of clothing and household items in “good condition or better” qualify for a deduction.
For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2007. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.
Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and not subject to the alternative minimum tax.
Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.
Evaluate whether you’ll save any taxes by postponing 2006 income or deductions into 2007 or by accelerating 2007 income or deductions into 2006.