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Financial Planning

10 Smart Year-End Money Moves

You can lower your tax bill next year by taking action now.

How would you like to cut your taxes and save some big bucks next year? You can.

But the key is to act now before numerous planning opportunities disappear -- some of them forever. Whether you are a salaried worker or self-employed, an active investor or retiree, here are ten steps you can take before the end of the year to lower your tax bill next spring.


Get Next Year's Refund Now

Last Chance Tax Move

1. Max out your retirement savings. If you haven't stashed the maximum $15,500 in your 401(k) or similar workplace-based retirement plan, you still have time to earmark extra contributions from you final few paychecks or year-end bonus.

Not only will the extra money help you build a bigger nest egg, but also it will reduce your 2007 tax bill because 401(k) contributions are not counted in your adjusted gross income. Workers 50 and older -- even if you turn 50 on December 31 -- can contribute an extra $5,000 in "catch-up" contributions, for a total of $20,500. The same maximum contribution limits apply for 2008.


If you're self-employed, you can shelter even more income in a tax-deferred retirement plan. You can contribute up to $15,500 of your salary plus up to 20% of your self-employment income to a solo 401(k,) for a combined total of $45,000. If you are 50 or older, you can add an extra $5,000.

Although you have to set up your solo 401(k) plan and contribute your employee share of retirement savings by December 31, you don't have to fund the employer portion of your contributions until you file your 2007 taxes, including extensions, which can be as late as October 15, 2008. For more, see Do-It-Yourself Retirement Plans.

2. Clean out your flex account. It's smart to set aside pre-tax dollars to pay your out-of-pocket medical costs, but don't let unspent dollars go to waste. Check with your company to see if it uses the old December 31 deadline for the use-it-or-lose-it penalty provision or whether it has adopted a grace period that lets you spend 2007 flex dollars until March 15, 2008. There are plenty of ways to use your remaining funds, including dental check-ups, eye exams, glasses, contacts and prescription or over-the-counter drugs.

And use this year's health-care spending as a guide for selecting your flexible spending account contributions for next year. Don't forget to factor in any anticipated changes, such as the birth of a child or braces for one of your kids. The IRS says you can use flexible spending account dollars to pre-pay orthodontia bills even if treatment stretches into the following year.


3. Review your health care options. Open enrollment season is the perfect time to review your company health insurance. The program you selected last year may no longer be the best choice if premiums have increased or your family situation has changed (see Check Your Health Coverage). And you may be able to save money by participating in new work-based wellness programs or coordinating family coverage with your spouse's company benefits.

4. Evaluate your investments. Despite recent market volatility, mutual funds are expected to post record returns this year -- and that means higher tax bills for mutual fund investors. Now is a good time to review your entire portfolio and consider selling some of your losers.

You can use the losses in your taxable account (but not retirement accounts) to offset an equal amount of capital gains. If you have leftover losses, you can deduct up to $3,000 from your ordinary income and save any excess losses to offset taxable profits and income in future years.

5. Defer capital gains. Stock owners have more control over their taxes than mutual fund investors. If you own stock and you expect to be in one of the two lowest tax brackets next year, hold off selling any shares until next year. That's because starting in 2008, taxpayers in the 10% and 15% tax brackets will pay no tax on the profits from the sale of assets they have owned longer than one year.


This zero capital gains provision, which extends through 2010, will apply to individuals with taxable income of up to $32,550 next year and married couples with joint incomes of up to $65,100.

But forget about trying to save taxes by shifting assets to your kids. Starting next year, children under 19 and full-time students under 24 will be affected by the expanded kiddie tax rules. Any of their investment income in excess of $1,800 will be taxed at their parents' higher rate and not eligible for the zero capital gains tax break (see Last-Chance Tax Move.

6. Be generous. Whether you're contributing cash or donating used clothing to a favorite charity, there are some new rules for 2007. Cash donations of any amount must have written documentation including the amount, date and name of the charity to qualify for a tax deduction. Used clothing and household goods must be in good or better condition to qualify for a tax deduction and donations of $250 or more require a written acknowledgement from the charity. Individual items valued at $500 or more require an appraisal. As always, you must itemize to claim a charitable deduction. Check out IRS Publication 526 for details.

7. Take tax-free IRA distributions. This year, IRA owners who are 70½ or older can make direct, tax-free donations of up to $100,000 from their IRAs to qualified charities. The donation can satisfy you annual required minimum distribution.


Although you can't claim a charitable deduction, you may still come out ahead because the donated IRA amount is not included in your adjusted gross income. By lowering your AGI, you could benefit from other tax breaks, such as reducing taxes on your Social Security benefits or boosting your deductible medical expenses.

This tax break, which applies only to IRAs and not 401(k)s or other workplace-based retirement accounts, expires at the end of this year unless Congress acts. You can donate your IRA directly to a charity but not to a donor-advised fund. You cannot use tax-free IRA distributions to fund charitable remainder trusts or charitable gift annuities.

8. Conserve energy. Installing energy-efficient storm windows and doors is a great way to cut your heating bill -- and your taxes. Do it by December 31 and you can claim a tax credit for 10% of the costs up to a maximum credit of $500 of which no more than $200 can be allocated to replacement windows. Installing a high-efficiency air conditioning system or water heater qualifies for a $300 tax credit, also subject to the $500 lifetime cap.

Taxpayers who install solar panels, solar water-heating equipment or a fuel-cell power system in their home by the end of the year are eligible for a tax credit of 30% of the costs up to a maximum credit of $2,000. But to qualify for the credit, no part of the system can be used to heat a pool or hot tub. All of the home-based energy tax credits expire this year.

9. Buy a car. If you're one of those taxpayers who deducts your state sales taxes rather than your state income taxes on your federal return, buying a big-ticket item like a car or boat can boost your deduction substantially.

For most taxpayers, the state income tax provides a larger deduction. But for residents of states that don't have an income tax, such as Texas or Florida, the sales tax deduction is an easy choice.

You can save your receipts or use the IRS's state-specific tables to estimate your sales tax based on your family's size and income. In either case, you can add the sales tax for major purchases like a car or boat. And no matter where you live, if you buy an energy-efficient hybrid car, you'll qualify for a tax credit of up to $3,000, depending on the make and model.

10. Shop for your classroom. If you're a teacher or teacher's aide, you can deduct up to $250 of the cost of books, supplies, computer equipment and software used in the classroom. You don't have to itemize to take advantage of this deduction, but you do have to act quickly. Unless extended by Congress, this deduction expires at the end of the year. So if you need classroom supplies for the spring semester, buy them now.