The last weeks in December provide an even better opportunity than early April to re-organize your financial life — if you can — to save money on your tax bill next spring.
One thing is sure: Income taxes are going up in the future. Some changes may not hit until 2011, after the year-end expiration of the George W. Bush tax cut plan. Others will take place during the year, as Congress trades favors to extend some of those previous cuts. The likely places to look are the estate tax and the tax on dividends.
But if Washington keeps spending — on both sides of the aisle — they'll have to pay for it somehow. Don't look now, but all those fingers are pointing at you. So take these tips to heart, because next year is certain to provide many changes.
Have a baby now! If you're already pregnant and deliver before Dec. 31 ends, it could save you thousands of dollars on your tax return! Babies born before the new year rings in at midnight Dec. 31 provide a $3,650 tax exemption when parents file their return next April.
Plus, lower-income families may get a child tax credit of up to $1,000 per child — refundable if they have no income tax liability. And the baby may also generate the Earned Income Tax Credit — a refundable credit for low-income workers, with the amount depending on their earnings and the number of children they have.
One more thing: Even if baby doesn't arrive before the stroke of midnight, proud grandparents and parents can open a 529 college savings plan this year, naming the baby as beneficiary when it arrives next year. You don't get a federal tax break for the contribution, but many states, like Illinois, do give a break on state taxes for contributions up to $10,000.
Organize your income. For those who get a regular paycheck, the taxes will depend on the year in which the income is paid — not on when you deposit the check! That income will be included in the W-2 form you receive in January.
But independent contractors or small businesses taxed as individuals, there may be a choice of when to bill for, and receive, income. Traditionally, the idea has been to defer income to future years while taking deductions this year, in order to reduce your tax bill. But if you expect income taxes to rise, or deductions to disappear, you might want to reverse that process — and take income now, before year-end.
Of course, you'll want to check with your accountant on this, because accelerating income this year may disqualify you from certain tax credits — such as deductions for "green" home improvements — or it may be enough to move you into a higher tax bracket. Check the tax calculator at the website of H&R Block (www.hrblock.com) to help figure out the impact of your moves.
Consider deductions. To lower your income this year, make charitable contributions now. That's not only tax-wise, but desperately needed by hard-hit charities this year.