It’s Never too Early to (Tax) Plan

We are a society of planners and list makers. Life these days is so less spontaneous – rarely do we do anything unless we get some kind of digital reminder that it’s time to do it.  We make lists on our Blackberries, computers, Post-It notes and then post reminders everywhere … on the refrigerators, cabinets, corkboards. It’s like having alarm clocks buzzing throughout the day.

Here is yet one more reminder–it’s never too early to do some tax planning.  Just as it seems that the Christmas sales begin the week after Halloween, before we turn around, it will be the end of the year.  And once we hit New Year’s Eve, it may be too late to do tax planning. What should you do?

• Check your charitable contributions for the year, particularly your donations of goods.  Look in your closet – there may be tax savings hidden among the old clothes and shoes. There is no limit to how much you are allowed to donate in clothing, housewares, furniture and artwork. The trick is in the documentation.  Technically, the organization you donate to is supposed to inventory and value the items. That’s not going to happen; the volunteers at Goodwill don’t have the time or facilities to do this. So, list your goods and assign approximate values to them, attaching your list to the organization’s receipt. If you don’t know how much to value that 8-track tape player you found in your mother’s garage at just check the Salvation Army’s “Donation Value Guide.” The Salvation Army’s guide is very useful, and most importantly, the values are reasonable and not likely to be disputed by the IRS.
• Pay your 4^th quarter state tax estimates early. Estimated taxes paid to state governments are deductible. While the 4^th quarter estimate is due in January, if you pay it on or before December 31^st, you can take the deduction in 2011. Of course, if you expect your income to change next year, it may make more sense to delay the deduction until then.
• If you are self-employed, you can accelerate some deductions by paying certain expenses prior to December 31^st.  If the cash is available, pay an extra month’s rent, or an insurance premium before it’s due. Again, you should project your income to see which year it makes more sense to take that deduction in.
• If you are a small business owner, one of the best ways to defer, and even avoid taxes, is to set up a retirement plan. While the IRS permits IRA contributions until April 15th of the following year, and SEP (self-employed pension) contributions until your return’s due date (including extensions), 401(k) plans must be set up prior to December 31^st to take advantage of them for the current tax year.  Many 401(k) plans now have a Roth option, which is not available to other retirement plans (such as the SEP or SIMPLE).  Again, the time to act is now.
• Do you file a tax return in New York?  If so, you can get a deduction on your New York tax return if you contribute to a New York 529 (college savings) plan.  New York will give you a deduction on the first $10,000 of 529 contributions each year. Note that the $10,000 refers to you and your spouse, not to a child. So if you have six grandchildren, the maximum deductible contribution remains $10,000.  You don’t have to open a 529 plan in your resident state, and you are allowed multiple plans. So, you are not precluded if you already have a New Jersey 529 account.  For information on New York 529 plans, visit https://uii.nysaves.s.upromise.com. 529 plans also make great estate planning tools for grandparents.
• Do you have a flex spending account?  We’re almost at the point in the year when we “use it or lose it.” While we are no longer allowed to use flex spending dollars for over-the-counter medicines such as Tylenol, vitamin supplements and adhesive bandages, there are certain over-the-counter medications that our doctors prescribe for us. So if your cardiologist tells you to take a low-dose aspirin, or if your allergist suggests Claritin, ask for a prescription. If it’s required by your doctor, and documented, then you can use flex spending dollars to fund it.  The same is true for weight-loss programs and gym memberships.
• Start gathering information. Remember when your grandmother would say to you, “Christmas is just around the corner?”  Well, don’t look now but Tax Time is just around the corner as well. If you use your car for business, how’s that mileage log looking?  If it looks anything like mine, it’s got incredible detail through just about the second week in February, and then it’s sporadic, with a couple of sticky notes and gasoline receipts. Getting yourself organized now will make the tax preparation process much easier later.