With 2008 just a few weeks away people are probably too consumed with holiday festivities to worry about their upcoming income tax returns. However, this could end up being a detrimental mistake. Even with only a few weeks left in the year there are still measures you can take to avoid IRS problems before they start. Below is a list of the top 7 send-of-the-year tax planning tips to help avoid a nasty IRS audit next spring.
1) Thoroughly review your income, expenses, deductions, and financial portfolio
Before you begin taking action to reduce your income tax liability, it is important to understand your specific financial situation. If your capital gains and wage income are lower than last year, and your expenses are higher, then you may not need to take any action at all.
2) Use your credit card for year-end deductible expenses
If you have deductible expenses (such as business or medical expenses) you can pay for them with your credit card, claim the deduction this year, and wait to pay off your credit card until next year.
3) Prepay any state and/or local taxes you might owe
If you are going to owe any money to your state or local government, you can use a state/local prepayment voucher and make your tax payment before the end of the year. That way you can deduct the amount from this year’s federal tax return instead of waiting until next year.
4) Make your next mortgage payment before December ends
Making your mortgage payment a few days early will allow you to take a higher interest deduction this year. However, keep in mind that this will result in a lower interest deduction the following year.
5) Make "catch-up" 401(k) payments
Typically, individuals must make 401(k) contributions throughout the year. However, some plans allow for "catch-up" payments in December if your contribution level is less than the maximum allowed. Contributing spare money in December to your 401(k) could be a great way to lower your taxable income, but keep in mind that not all plans allow for this "catch-up."
6) Gather all charitable contribution receipts
If you made any charitable contributions this year make sure you have the receipts handy. New IRS restrictions require receipts for any contributions over $250, and gathering this information ahead of time is much easier then frantically searching for receipts before an IRS audit. If you have not made any contributions this year you may want to do so before the end of the year.
7) Defer income until next year
If you can defer some of this year’s income until next year you will have lower taxable income this year and thus have a lower tax liability. This tactic is easier for self-employed individuals, but can work for numerous other taxpayers as well.