12 Last Minute Tips to Help You Pay Less Income Tax

The end of another year is rolling around fast. Before you go to that New Year's Eve party, there are many steps you can take to reduce your personal income tax.

1. Charitable donations: If you're going to give, now is the time. Even donations made on your credit card, and not paid for until 2007, or checks mailed on December 31st count as deductible donations for the current year. (Obviously consider the balance between the amount of interest you'll pay on the credit card charge compared to the tax deduction). If your gifts are very large, however, talk to a tax advisor and make sure it will be fully deductible. There are limits to how much you can deduct, based on your income.

If you donate appreciated assets, you can achieve an even bigger benefit. If you're thinking of selling the assets to donate the money to a charity, think twice. You'll end up paying capital gains tax on the sale. Instead, give the assets directly to a qualified charity. You avoid the taxes and still get a deduction for the full fair market value of the donation. And a tax-exempt charity can sell the assets and also not pay tax. It's one of life's true win/win situations where the IRS is concerned.

Thanks to the Pension Protection Act (PPA) signed by President Bush in 2006, if you are 70 1/2 or older, there is a new tax saving opportunity for you. The PPA permits you to donate cash directly out of your Roth IRA to many tax-exempt charities. Sit down with your financial advisor for details.

Beware! For household goods donated after August 17,2006, you can only deduct their value if they are in good condition.

See "Additional resources" for more information from the IRS.

2. Take your college tax breaks. If you have a college tuition bill due in early 2007, you can pay it this year, and scoop up Hope and Lifetime Learning credits on your 2006 tax return, provided you qualify. You can prepay for academic periods beginning in the first three months of 2007. See "additional resources."

Also, thanks to a last minute new tax law passed in December 2006, taxpayers can still deduct qualified higher education expenses of up to $2,000 or $4,000 (depending on your income). This deduction can be taken whether or not you itemize. This deduction has been available in the past, but was set to expire at the end of 2005. The Tax Relief and Health Care Act passed this month just before Congress adjourned extends this deduction through 2007.

3. Medical and dental expenses. You can deduct unreimbursed medical and dental expenses you pay for yourself, your spouse, and your dependents, to the extent they exceed 7.5 percent of your adjusted gross income. That includes health insurance premiums like medical, dental, and vision care, prescriptions drugs, doctor co-pays, and other out of pocket medical costs. The 7.5 percent hurdle is a tough one to clear for many taxpayers. If you think it will be close, try moving some expenses into the current year. For example, if you need an eye exam in the next few months, or a dental check-up, why not get it done in December and possibly get a tax deduction? See "additional resources."

4. Retirement contributions. Beef up your retirement plan with the maximum contributions, assuming you qualify. Not only are you protecting your future, but minimizing today's tax bill. Generally you can contribute a maximum of $15,000 in 2006. And if you are 50 years of age or older you may be able to contribute an additional $5,000 in 2006, all of it on a tax-deferred basis. For IRAs the maximum you can contribute is $4,000, with a catch-up of an additional $1,000 for those 50 and over. You can continue to make tax-deductible contributions to most retirement accounts right up to the date you file your income tax, though for some types of plans you need to be sure the account is set up by December 31st. Others, like IRAs can generally be set up at any time.

5. Energy efficient home improvements. For 2006 and 2007, you can purchase storm windows, insulation, solar panels, electric heat pumps, and other energy conscious home improvement items, and get tax benefits. Ask your tax advisor for more details.

6. Don't forget to take Required IRA Distributions. If you are due for a required distribution for 2006, be sure to complete the transaction by the end of the year, or you may face a 50 percent penalty on the withdrawal you missed.

7. Beware the alternative minimum tax (AMT). Your tax advisor can estimate your likelihood of being hit by the AMT for 2006. If he or she thinks you will be subject to the AMT, you can avoid the tax by postponing certain "tax preference items" till 2007. Also, if your highest tax rate is lower than your AMT rate, it may pay to accelerate some income into the current year.

8. Support your college student. If you have a child in college or grad school who is under the age of 24, you can still claim that child as a dependent if you provide more than half of his or her support. It could be that by adding a few extra dollars to the support you give, you can gain a dependent.

9. Capital gains and losses. Have you sold stock or other property this year that is subject to capital gains? If so you may be able to offset some or all of the gain by selling some loser stocks you may be hanging onto. You can also write off another $3,000 against ordinary income.

10. Mortgage interest. If you have a mortgage payment due around the first of January, mail the check in December to get the benefit of the extra mortgage interest deduction. By January 31 your mortgage lender must send you a statement of interest paid (over $600). Interest on home equity loans and lines of credit are also generally deductible. See "additional resources."

11. Bundle last minute deductions. If you usually end up owing state tax after you do your tax return, try making an extra state tax payment before the end of the year. Don't forget to add together expenses like union dues, professional dues, tax preparation fees, and job-hunting expenses. If you have a property tax payment coming up soon after the end of the year, paying it before the end of the year will allow you to deduct it, assuming you will be itemizing. Don't assume you can't itemize until you've run the numbers.

12. Flexible spending accounts. Take advantage of these pre-tax accounts. If your employer offers such an account and will let you sign up before the end of the year, use it to the maximum while there is time. You have until March 15 to use up the funds designated for this year. These programs deduct money from your paycheck pre-tax to pay medical expenses. Before the year ends, get a new pair of eyeglasses if you are about due for them, have a dental check-up, and stock up on prescription and over-the-counter drugs. This is a use it or lose it program (though the rules have eased up significantly) so don't overestimate what your expenses will be.