1. Compare Your Standard vs. Itemized Deductions
Are your itemized deductions close to your standard deduction [link to itemized vs. standard deductions article] for this tax year? If so, consider shifting some of your deductions to next year, when you might be able to itemize more. For example, consider making your annual charitable donation in January instead of December so it counts for the following tax year.
2. Make Flexible Spending Work for You
If you don't have enough medical expenses for the year to meet the amount you set aside in your flexible spending account (FSA), you'll lose the money. If you have extra money in the FSA account to spend, you might want to:
- Schedule end-of-year appointments
- Buy new prescription glasses and contact lenses
- Buy medicines you’ll need the next year
3. Submit your receipts for eligible expenses within the time required by the plan.
Some plans allow you an extra 2.5 months after the end of the year to use the unspent amount, but make sure to check with your plan administrator.
3. Review Your Medical Costs
Keep track of the medical expenses you’ve incurred this year and have not been reimbursed for. You can deduct them only if they’re more than 7.5 percent of your adjusted gross income (AGI). If you're close to the 7.5 percent requirement, consider fulfilling it by having an elective or necessary procedure before the end of the year. But first, check that the procedure is among the qualifying deductible expenses. Many elective procedures don’t qualify for this deduction.
4. Get Serious About Retirement
One way to lower your taxable income for the year is to contribute to a retirement plan, such as a:
- Deductible IRA
- SIMPLE IRA
Contribution deadlines vary based on the type of plan you have. For example, December 31 was the deadline to make contributions to 401(k)s and 403(b)s for 2011, but you have until April 17 to make contributions to IRAs and some other plans.
5. Adopt a Charitable Attitude
Make sure to donate clothing and household goods to charities before January 1 in order to deduct those donations for the current tax year. Get a receipt from the organization(s) you're donating to. The deduction is limited to each item's current fair market value (what you could sell it for at, say, a garage sale).
6. Sell Off Securities
If you have a large net capital gain as the end of the year is approaching, you might want to sell some stock to generate a loss before year’s end. This could reduce the amount of tax you pay for the year. Keep in mind, though, that if you’re trying to sell stock to generate a loss, you’re prohibited from purchasing substantially similar stock for 30 days before or after the sale that’s generating the loss.
7. Give the Gift of Cash
You can give a gift of up to $13,000 to any one individual free of gift tax. If you're married, you each can gift a person up to $13,000 tax-free -- that’s $26,000 in total. In most cases, the gift isn’t complete until the recipient of the check cashes or deposits it. So tell whoever’s receiving that check to cash it by the end of the year.
8. Don’t Let Extra Money Sit Around
If you have a large amount of cash to invest and want to shift some of your income to the following tax year, consider investing in a short-term CD or a US Treasury bill that will mature in the coming year.