Reducing Your Taxes: Part 1 of 3
End-of-Year Tax Break Exercises
Before you know it the ball is going to drop as we ring in the New Year. But before it is officially 2008, let’s spend some time wrapping up 2007 by discussing some ways you can lower your realized income, which means a lower tax bill or a bigger tax return. Here are 7 end of the year tax tips to reduce your taxes this year:
Sell Your Losers: Everybody makes a bad stock pick now and again, which is why we diversify. If you picked a lemon of a stock that you don’t think can bounce back over the long run, consider selling it now to qualify for capital losses. This will allow you to offset any capital gains tax from any winning stocks you may have sold throughout the year. If you have more loses than gains, you can deduct up to $3,000 in loses from your regular income. Just don’t buy any other shares of the same stock 30 days before or 30 days after you sell the loser or it will be considered a wash-sale and you will not be able to take advantage of this tax law.
Donate Your Winners: In the spirit of giving, you can donate your appreciated assets, avoid paying capital gains on them and deduct the full value of the asset. So, for example, if you purchased $600 worth of stock (or a mutual fund) a year ago and it is now worth $1,000, you are able to deduct the full $1,000 from your income. This is only the case for assets that have appreciated in value and you have held for more than a year.
Bulk-up on Retirement: Your maximum allowable 401k contribution for 2007 is $15,500 ($20,500 if you are 50 or over), and any contributions are reduced from your taxable income. Your $4,000 contribution to a traditional IRA may also be deducted from your income.
Make an Extra Mortgage Payment: Interest you pay on your mortgage is tax deductible. Getting that January mortgage payment in before the end of the year will boost your interest deductions.
Pay 2008 Property Tax: Real estate property tax is also a deductible itemization. If you have a bill due in early 2008, you can pay it in 2007 to increase your itemized deductions.
Give to Your Favorite Charity: As of 2007, any charitable contribution must be backed up by a canceled check or a receipt, regardless of the amount. When possible, use a credit card when making donations. If you write a check, you run the risk of not having the check clear until 2008. If you donate clothes or household items, they must be in good condition and you can only deduct the fair market value.
Millionaire Money Habit: Wealthy people have mastered the art of minimizing realized, taxable income in order to keep more of their money invested. Take advantage of the tax code and challenge yourself to maximize tax advantages as much as possible over the next month.