1) Exhaust flexible spending accounts or other tax advantaged workplace health benefit plans. Most of us let hundreds go unused each year in accounts that are use it or loose it. Using remaining funds can be as easy getting new glasses, prescription sunglasses or working in one last trip get your teeth cleaned before year end.
2) Pay college tuition costs early to maximize the American Opportunity Tax Credit, a 100% refund on the first $2000 you spend toward college each year and 25% of your next $2000 in expenses. This is one of the few deductions comes as a refund even if you don’t owe any taxes, making it very popular with students. The credit is phased out for taxpayers whose adjusted gross income exceeds the $90,000 and $180,000 thresholds.
3) Make big purchases now. If you’re planning to buy a new car or engagement ring speed up that purchase before year end before the sales tax deduction goes away in Jan 2014. IRS allows you to deduct either state income tax or sales tax. This deduction is very popular used by 57 million Americans living in primarily low or no income tax states (AK, FL, NV, NH, SD, TN, TX, WA, WY). Congress could reinstate but better to assume they won’t
4) Harvest tax losses. With stock market at all time highs and a host of new taxes/increases kick in on investment income, now is the time to manage your capital gains to reduce tax bite. Smart strategies include (1) selling off stocks with losses now to offset gains and (2) post-poning sale of profitable investments until January to push the tax bill to 2014.
5) Make charitable donations to reduce taxable income. Year end is a good time to donate clothing and furniture; you’ll not only help those in need but yourself with a nice deduction. And by donating highly appreciated stock instead of cash, you’ll skip paying taxes on the capital gains and get a deduction worth the market value of the securities.