Putting more in your 401k, buying a house or car, or giving to charity are among the moves that, if made by Dec. 31, will help shrink your tax bill next spring.
By Kimberly Lankford, Kiplinger’s Personal FinanceA reader wrote me recently: “I have discovered only three ways to cut my taxes: reduce income, give more to charity and incur major medical expenses. Is there anything else I can do?”
The reader has the right idea: Anything that reduces your income or maximizes your credits and deductions will lower your tax bill.
And now is the perfect time of year to make some moves that can help you shrink your tax liability for 2009 — and make key decisions about your employee benefits that can cut your taxes for 2010. Here are 10 ways to lower your taxes:
Boost your 401k contributions: Any money you contribute to a 401k lowers your taxable income. You can contribute up to $16,500 to a 401k in 2009 (plus an extra $5,500 if you’re 50 or older). You still have a few months to boost your regular contributions, or you can add any year-end bonus you receive to help max out your contributions before 2009 is over.
Make the most of your flexible spending account: Contributions to a flexible spending account avoid income tax and Social Security tax, which can save you 35% or more compared with spending after-tax money. Most employers require you to use your FSA money by Dec. 31 or by March 15 of the following year, so make sure you’re on track to spend the money in your account before the deadline (otherwise it disappears). See “25 ways to spend your flex account” for more information.
You’ll be making key decisions about next year’s FSA account over the next few months, and you may want to boost your contributions if your employer is increasing your out-of-pocket health care costs for next year — as many of them are.
The maximum-contribution limits vary by employer, but many let you set aside $3,000 a year in pretax money for a health care flexible spending account and up to $5,000 in a dependent-care FSA. Note that Congress is now considering a bill to cap the FSA deduction at $2,500 and limit the expenses to insulin prescription drugs.