Taxes usually aren’t our top priority, especially when we’re running around doing all sorts of holiday-related tasks. But there are some steps you need to take before the end of the year — putting them on your to-do list will help you avoid paying Uncle Sam more than you have to when April rolls around.
Get insured. Under the Affordable Care Act, people have to have health insurance starting January 1, or they’ll be penalized when they file next year’s taxes in 2015, says Mark Steber, chief tax officer with Jackson Hewitt Tax Service Inc. 2015 is a long ways off, but a lack of planning now could come back to bite you. ”The penalty is imposed by the IRS and will be computed on the taxpayer’s form 1040 income tax return and will be subject for each month they do not have coverage,” Steber explains. “If they have coverage for part of the year, the penalty will be less.”
Check flexible spending accounts. A growing number of Americans use these accounts, which are offered by more than 85% of large companies. F.S.A.s let you use pre-tax dollars to pay for certain healthcare-related expenses. There are some use-it-or-lose-it rules that vary by plan, so check with your HR department. Some plans give users a grace period until March 15 to spend down the balance, and a new rule announced by the IRS this fall gives companies a second option of letting account holders rollover up to a $500 maximum (this is instead of a grace period, not in addition to).
Boost retirement savings. It’s probably too late to bump up your 401(k) contributions for the year, since changes generally take one pay cycle to implement, but it’s not too late to make a contribution to an IRA, says Lindsey Buchholz, tax attorney and lead research tax analyst with The Tax Institute at H&R Block. Contributions up to $5,500 to a traditional IRA are deductible if you’re under 50 and if you and your spouse don’t have retirement plans through work. If you do have a work retirement plan, the IRS breaks down the limitations for deductions here. “IRA contributions for 2013 must be made by April 15, 2014,” Buchholz says. “So if you’d like to contribute to an IRA, there is still time.”
Give it away. ”Making charitable gifts before year end to use the deduction on your 2013 income tax return,” says Beth Tractenberg, a partner at the law firm of Katten Muchin Rosenman LLP, who works on estate and tax planning. “Charitable deductions may be more valuable given the higher 2013 income tax rates,” she says. If you suspect (or know) that your income is just above the cutoff for a higher tax bracket, donations and the associated deductions could bring you back below that threshold.
(MORE: The Hidden Cost of Tax Refunds)
Go green. “If you are planning certain energy-efficient home improvements, such as energy-efficient windows, doors, or insulation, consider completing the installation in 2013 so you can benefit from the nonbusiness energy property credit,” Buchholz says. The credit, which is set to expire at the end of the year, has a lifetime limit of $500, she says.
Don’t forget the home office. “If you are eligible to claim a home office deduction, do not shy away from taking it since the rules have been loosened this year,” says Bryan I. Pukoff, a regional principal and member of the Tax Executive Committee at accounting firm Rehmann. As a reminder, he says the home office has to be used “regularly and exclusively” for work — so an office-slash-gym or den won’t qualify. “Under a new simplified option, taxpayers can take $5 a square foot up to 300 square feet without worrying about the paperwork and recordkeeping burden of claiming actual expenses,” he says.