Utahns can save on taxes with these end-of-the-year tips
It's easy to get caught up in the holiday spending madness, but the tax man cometh.
April 15 is still months away, but December is the time taxpayers can help reduce the amount they owe the Internal Revenue Service with some last-minute spending changes.
Finding deductions is much easier for filers who itemize, but there are options for many people in several income brackets.
All taxpayers should look at their own incomes to determine whether taking certain financial actions in December is worth it.
"You really want to look at your income, and if you do have income, you'll want to look at that," said Terry Marti, an enrolled agent with H&R Block in Cottonwood Heights.
Charitable donations • As the spirit of the season takes hold of many Utahns, making donations to charities can have the double benefit of helping a worthy cause and providing a tax benefit, said Bill Brough, vice president of the Utah chapter of the National Association of Tax Professionals.
Not all donations have to be made in cash. They can be in-kind donations, accepting gently used items instead.
"By doing something like cleaning out a garage or closet and donating the items to a qualified charity, taxpayers will be able to take tax benefit on their taxes," said Bill Brunson, spokesman for the Internal Revenue Service.
It's essential, though, that the charity be recognized as a 501(c)(3). To check, visit http://www.irs.gov.
It's also important that those making donations check to make sure the group they are donating to is legitimate.
"Sometimes people get lured into making contributions that either aren't reputable or are just flat-out fraudulent," said Rob Brough, executive vice president of Zions Bank.
He warns donors to be wary of emails that contain links to a website as "fraudsters can create spoof sites" that look real but in fact are not. Instead, he recommends going directly to a website by typing in the URL or calling a familiar phone number.
Retirement fund contributions • For those who have a 401(k) or an IRA, adding extra money at the end of the year can lead to a tax benefit as well.
"The issue there is you pay for the benefit you get," said Bill Brough, who is an accountant at Sandy's Bottom Line Bookkeeping and Tax. "You still have to give up the money."
But he recommends it for anyone who has the cash on hand because planning for retirement at any age is important.
"The wonderful thing about using an IRA instead of a savings account is it clamps down on temptation to withdraw it early because of the penalties," Bill Brough said.
Mortgage • Homeowners can look at their income for the year, and use a tax calculator to estimate how much they'll owe in taxes. If it's high, making an extra mortgage payment can help reduce taxes. However, it will impact the following year's taxes, the IRS' Brunson warns.
"Sometimes you can cause something to happen in the accounting period you're in, but keep in mind there might be a net result in the subsequent year," Brunson said. "If you make another month's mortgage payment in December, you get a benefit in 2013, but it will affect you in 2014."
Education benefits • Anyone who plans to enroll in higher education courses in January can take the education tax credit if they pay tuition in December.
It's possible to put that amount on a credit card and pay it off in January, but still take the deduction, Marti said.
Avoiding higher taxes or penalties • Taxpayers who want to save some money in taxes should also look to make sure their exemptions and withholdings are correct.
For individuals making at least $200,000 or couples making $250,000, the law for Medicare tax withholding has changed. People in those income brackets must have an additional percentage withheld. A good employer will do that for an individual, but if two spouses make less than $200,000 each, it's important to check with employers to make sure those withholdings have been correct, accountant Bill Brough said.
"Even if enough hasn't been withheld, you should start saving so you have the money when it comes down to paying," he said.
Another area to be careful with is health insurance requirements. Under the Affordable Care Act, there are penalties for people who do not have health insurance beginning next year, and the fines only increase each year, Bill Brough said.
"Sometimes it's not how to look at benefits, but what can you do to avoid additional taxes and penalties," he said.
Looking ahead • December is a good time to be thinking about planning for taxes next year because if you wait until January, you've missed the opportunity to maximize deductions.
"One of the things we say to people is the difference between tax planning and tax preparing is that if you wait to Dec. 31, it's tax preparing," said Bill Brough.
But it's not too early to start planning for 2014 taxes.
Anyone looking to replace major appliances or windows should look at energy-efficient models that can lead to a tax break, he said. Also, anyone shopping for a new car could consider an electric vehicle, which also comes with a tax break.
For charitable donations, Rob Brough recommends building a budget that allows taxpayers to make such donations either spread out over the year or to squirrel money away for December giving.
In any case, it's important to know your own financial situation and what will benefit you most.
"If you can itemize, then there can be a benefit for you could lower your taxes," said Bill Brunson. "But it has to be usable. That's the key."