5 Things to Do Before December that You'll Thank Yourself for in April

Will you be ready come April?
Will you be ready come April?
AP Photo/Seth Perlman

America is officially a nation of procrastinators. Scientific studies have shown that 94.76 percent of us wait to file our taxes until April 15, causing ourselves unhealthy amounts of stress and wreaking havoc on the postal system. Tax time is painful for all of us, but you can save yourself some grief (and possibly a decent amount of money) if you start preparing in December. That's right, four months early.

We realize that just the thought of doing anything tax-related in December could make you break out in a cold sweat. If you're accustomed to pulling all-nighters at the last minute, scrambling for misplaced forms and waiting for 12 hours at the post office on April 15, it will seem extreme to start thinking about tax season before Christmas. But trust us, you'll be happy if you do. And it doesn't involve anything unduly complicated: You don't have to be a tax expert or memorize every loophole in the book to make the system work for you. We've done half the work by compiling these five easy tips, so all you need to do is get started early and stay focused. We guarantee that you'll save some money -- and perhaps get that return in the mail before April.

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5

Prepare Yourself

At the end of the year, you should start reviewing what you've earned, lost, spent and saved over the past 12 months, keeping an eye out for potential deductions. There are a number of little things you can finagle that could lower your tax bill (or get you a larger refund) in April. For example, if there's any way you can decrease your taxes by deferring income until January, you should make every attempt to do it. If you're self-employed, you can hold off on sending invoices so you're more likely to be paid in January instead of December. You should also stock up on equipment or supplies in December so they'll be deducted in April.

We'll get into more detail about end-of-the-year tricks of the trade on the following pages...

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4

Prepay Your January Mortgage

Another way to get a little bit of a tax break is to send your January mortgage payment in December. The mortgage payments you make on the first of each month represent interest from the previous month, so the January payment is for December's interest. Even if you pay just a day early, on Dec. 31, you'll be able to claim the deduction for December instead of January. Experts advise to pay just a little bit before the last day of the year, though -- you'll still be fine with a Dec. 31 payment, but it might add paperwork in April because the lender might not have time to record the payment on your year-end tax forms. And you also need to keep in mind that if you take 13 months of interest deductions one year, you'll get only 11 or 12 the next year.

3

Be Philanthropic

We'd like to believe that everyone makes charitable contributions completely out of the goodness of their hearts -- we would never be so cynical to suspect that some of us are donating simply to get a tax deduction. But OK, we'll admit that the truth might be somewhere in between. And if you are at all concerned with those deductions, now's the time for a friendly reminder that you can deduct only the contributions you make during the actual tax year -- so you need to send that check or donate your items by Dec. 31, not April 15. While you're at it, make sure that the charity in question is a qualified 501(c)(3) organization, and keep those receipts and official records. You're going to need to itemize all contributions on your 1040 form.

2

Get Healthy

Or perhaps the title should be: Get Healthy (if it looks like your medical expenses for the year will add up to more than 7.5 percent of your adjusted gross income). This one is a little complicated, but basically -- unless you're self-employed -- you can deduct medical expenses if they exceed 7.5 of your adjusted gross income. So, if you know you're close to 7.5 percent for the year or have already gone over it, go ahead and maximize that deduction. Pay any outstanding bills or premiums, get those new glasses or contacts, and schedule expensive procedures you might have been putting off. However, if you know you're going to be under 7.5 percent, you should try to hold off on medical spending until next year.

1

Sell, Sell, Sell

Yes, we're aware of the old "buy low, sell high" wisdom, but there are exceptions to every rule, and the end of the calendar year can be one of them -- depending on your situation. In December, if you know that you're going to be recording (and thus getting taxed for) capital gains on your investments, you might want to consider offsetting those gains. And the way to do that is to sell some of the lower-performing stocks in your portfolio to generate tax-deductible losses. It could go against every fiber of your body to sell low and take a loss, but it'll pay off in April. By the same token, you probably shouldn't invest in anything high-performing at the end of the year. You'll get taxed on the gains even if you just bought it.

Check out the next page for more information about the dreaded tax season.

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Sources

  • AllBusiness.com. "10 Year-End Tax Tips." (Accessed Sept. 16, 2010) http://www.allbusiness.com/personal-finance/individual-taxes/2483-1.html
  • Bell, Kay. "Cut Taxes with Early Mortgage Payment." Bankrate.com. (Accessed Sept. 15, 2010) http://www.bankrate.com/finance/taxes/cut-taxes-with-early-mortgage-payment-1.aspx
  • Bradford, Stacey L. "Year-End Tax Tips." WalletPop.com. (Accessed Sept. 16, 2010) http://www.walletpop.com/top5/taxes/year-end-moves/
  • H&R Block. "Medical Expenses." (Accessed Sept. 15, 2010) http://www.hrblock.com/taxes/tax_tips/deductions_credits/medical_expenses.html
  • H&R Block. "Year-End Tax Tips." (Accessed Sept. 15, 2010) http://www.hrblock.com/taxes/tax_tips/tax_planning/yearend_planning.html
  • IRS.gov. "Ten Tips for Taxpayers Making Charitable Donations." (Accessed Sept. 15, 2010) http://www.irs.gov/newsroom/article/0,,id=172936,00.html