End-Of-Year Tax Planning, Part 2
Last week we covered some last-minute tax planning tips to do before the end of the year. Here are some more.
* Accelerate Your Mortgage Payment. Unlike rent, which is paid in advance, mortgage payments are made at the end of your occupancy period. This means your Jan. 1 mortgage statement represents interest for December, making it eligible for a tax break this year. By accelerating that payment even by just a day, you get an additional deduction for the interest paid. Unfortunately, you can’t make your February or any other upcoming mortgage payment early to boost your year-end deduction amounts, since write-offs for pre-paid interest are generally prohibited. Note: Accelerating your mortgage payments may not pay off if you expect to be subject to the Alternative Minimum Tax (AMT). If you are unsure, discuss the matter with your tax professional.
* Give to Charity. A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. If the gifts are deductible, the actual cost of the donation is reduced by your tax savings. For example, if you are in the 33 percent tax bracket, the effective cost of a $100 donation is only $67. As your income tax bracket increases, the real cost of your charitable gift decreases, making contributions more attractive for those in higher brackets. For a person in the highest tax bracket, 39.6 percent, the actual cost is only about $60. Not only can those who make more generally afford to give more, but they also receive a larger reward for giving. Typically, charitable donations are capped at 50 percent of your adjusted gross income (AGI), though limits of 20 percent or 30 percent may apply in some cases.
* Give a Gift. This time of year, many people choose to donate items to charity instead of making a monetary contribution. Not only does this save you money and prevent perfectly good items from going to waste, but charitable donations can be deducted from your taxes as long as you get written documentation of the donation. Most gifts are not subject to the gift tax. For instance, you can give up to the maximum annual amount ($14,000 in 2013) to as many people every year, without facing any gift taxes. Recipients never owe income tax on the gifts. In addition to the annual gift amount, until the end of 2013, you can give a total of up to $5.25 million before you start owing the gift tax. This gift exclusion amount will increase to $5.34 million in 2014. Remember, this is a lifetime limit, so it will continue to increase each year with inflation, increasing the amount that you can gift without owing taxes on it.
* Go Green. Buyers of plug-in hybrids and electric cars benefit from a tax credit of $2,500 to $7,500, depending on the size of the battery in the car. The credits apply to plug-in hybrids purchased after 2010, though certain models may have been phased out. In addition, energy-efficient home improvements to your principal residence, such as installing a heat pump, qualify for credit of 30 percent of the cost and can be claimed on your 2013 taxes.