"Let me tell you how it will be. Here's one for you, nineteen for me."
With apologies to George Harrison, the "Tax Man" -- as described in the eponymous Beatles song -- is getting ready to put his grubby mitts on your wallet.
Tax planning is a year-round activity; it shouldn't be a last-minute panicky rush as April 15 looms. Nevertheless, it's still not too late to implement these seven wise tax moves before 2010 has run its course. You have about two weeks left before the December 31 deadline strikes.
1) Make your January 1payment on December 31.
Here's a neat little trick that seems very simple and obvious, but it never occurs to most people.
Here's how it works: When it comes to rent, you make the payment in advance, because landlords want to make sure they get paid for time you're living in their property. That means your January 1 rental payment covers the upcoming month.
However, the situation is reversed with mortgages. Your January 1 mortgage statement reflects interest for the preceding month of December -- making it technically eligible for the mortgage interest tax deduction for that year.
If you want to take advantage, be sure to get the money into the mail (or paid online) in time for your mortgage lender to receive it before the end of December. Then the interest paid can be reflected on the lender's annual statement to you (typically, the Form 1098), which details the deductible interest you've paid.
2) Convert your traditional Individual Retirement Account (IRA)
The Roth's best feature: all withdrawals are tax free if you are at least 59 ½ and the account has existed for at least five years. First you'll need to pay taxes on the previously untaxed money in your traditional IRA, but if you make the conversion this year, you'll be allowed to pay half the conversion costs in 2011 and the remaining half in 2012.
[To learn more about why now is the best time to convert your IRA to a Roth IRA, check out One Reason Not to Wait Until 2011 to Talk to Your Tax Attorney.]
3) Increase your home's energy efficiency.
As a homeowner, you can receive a tax credit for up to 30% of the first $5,000 you spend on qualifying residential energy upgrades. That's $1,500 in tax credits. So, if you've been considering installing more efficient windows or putting solar panels on the roof, now's the time to take the plunge.
And don't forget, the benefits extend beyond just your tax situation. You'll also save money on your heating bills and you'll live in greater comfort.
Note that these energy credits are likely to get repealed by the incoming Congress, since Republicans who never liked energy-efficiency tax credits will take control of the House and add to their minority in the Senate.
#-ad_banner_2-#4) Buy a hybrid car.
What to be more "green" and do something to combat global warming? You can get a nice, fuzzy feeling -- and also claim a significant tax credit -- by purchasing a hybrid automobile.
A tax credit of up to $3,400 for a hybrid automobile is good through 2010, but manufacturers are only entitled to provide a tax credit for the first 60,000 cars they sell. In other words, the tax credit is restricted to manufacturers that have not already sold 60,000 eligible cars.
The amount of your tax credit will vary according to gas mileage, make, model, and date of purchase. Before you buy, shop around and study the respective credits allowed for each vehicle.
[If you'd rather buy used, check out 5 Essential Tips for Buying a Used Car.]
5) If you're 70 ½, beware of required minimum distributions.
Legal requirements that you start taking money out of IRAs and 401(k)s once you turn 70 ½ were eliminated in 2009, but they're back in the tax code for 2010. The IRS assesses a whopping 50% penalty for non-compliance. So if you're over 70 1/2, make sure you've received a minimum distribution before December 31.
President George W. Bush's tax cuts included reductions in capital gains tax rates based on taxpayer adjusted gross income. Today, the highest capital gains tax rate is 15%, but taxpayers in the 10-15% marginal tax brackets pay zero capital gains.
Under the existing Bush tax law, the top capital gains rate will return to 20% and the lower tax brackets will owe 10%. To be sure, a compromise tax bill that would extend the Bush tax cuts is now wending its way through Congress, but the measure is highly controversial and nothing is certain. If you've been thinking about taking advantage of those lower rates, stay on the safe side and pull the trigger, now.
7) Make a charitable contribution.
It's the holiday season, which makes it the perfect time to combine charity with shrewd tax planning. If you itemize your income tax deductions, don't forgo a golden opportunity to give away unneeded clothes, cars and household items to, say, the Salvation Army or Goodwill Industries.
Your tax deduction for non-cash property gifts (stocks, real , etc.) is the fair market value at the time of the gift. That means you don’t have to pay taxes on any appreciation that occurred while you owned the asset.
In any one year, you can deduct up to 50% of your adjusted gross income for charitable contributions. For appreciated property, the amount you can deduct is 30%.
[To learn more about being a smart philanthropist, check out my other articles on the topic: Slash Your Taxes Using Charitable Giving Plans and Shrewd Philosophy: How to Give Without Getting Taken.]