1. Make the most of your home
Make your January mortgage payment by Dec. 31 and deduct the mortgage interest on your coming tax return. The same is true for early property tax payments.
2. Bunch your deductible expenses
Medical and dental expenses, for example, cannot be deducted unless they exceed 10 percent of AGI. Miscellaneous expenses, which include business expense claims, must be more than 2 percent of AGI.
If you have medical expenses that are over 10% of AGI, then pay those expense by 12/31.
3. Save for retirement
Remember that added money you put in your 401(k) to lower your taxable income? Bulk up your retirement planning even more by contributing to an individual retirement account.
If you have an IRA account or open a traditional IRA, you might be able to deduct at least some of your contributions on your tax return. If you don’t make a lot of money, your contribution also could be used to claim the retirement savings contributions credit.
Self-employed workers also get an added retirement saving benefit. There are a variety of plans — SEP-IRAs, Keoghs, solo 401(k) plans — into which you can put some of your self-employment earnings. If you’re a sole proprietor, your contribution to a self-employed retirement plan also is deductible on your tax return.
4. Be generous to charities
As you’re putting together your holiday shopping list, be sure to include charitable gifts that could help reduce your tax bill. In addition to the usual dollar donations or household goods and clothing, consider some less traditional ways to give to charities.
Many groups will accept vehicles, with some even making arrangements to pick up the jalopies.
Donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio rebalancing nets you a deduction for the asset’s value at the time of gifting. Even better, you don’t have to worry about capital gains taxes on the appreciation of your gift.
5. Pay college costs early
Pay the spring semester tuition by year end. By doing so, you can claim the American Opportunity Tax Credit on this year’s tax return.
It’s worth up to $2,500 with up to 40 percent of the new credit refundable. That means you could get as much as $1,000 back as a tax refund even if you don’t owe any taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.
6. Defer your income
Ask your boss to hold your bonus until January. Put more money into your tax-deferred workplace retirement plan. Hold off on selling assets that will produce a capital gain. If you’re self-employed, don’t send out invoices for year-end jobs until early 2014.
7. Harvest tax losses
If you have assets in your portfolio that have lost value, they could be a valuable tax tool. Capital losses can be used to offset any capital gains. If you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital losses could be especially helpful to higher income taxpayers facing the 3.8 percent Net Investment Income Tax. This surtax, part of the Affordable Care Act, applies to the unearned income of taxpayers with modified adjusted gross incomes of more than $200,000 if they are single or head of the household; $250,000 if married and filing jointly; and $125,000 if married and filing separately. High earners with investment income can reduce this new tax burden by using capital losses to reduce their taxable amount.
If you do face the 3.8 percent surtax, consult with your financial adviser and tax professional. In addition to figuring your modified adjusted gross income, you must take into account the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category.