Standard End-Of-Year Tips to Decrease 2011 Tax Bill

Teresa L. Clark

In this merry season of parties and holidays, there is one holiday in particular you might want to keep an eye on: the 2-percent payroll tax holiday. The year-long “raise” workers received this year is set to expire Dec. 31 as the clock strikes midnight. What is unknown is if it will be extended or increased to a 3.1-percent deduction. We will all know the answer very soon because Congress is expected to vote this week – and there may be more votes in the coming weeks.

In case you forgot, you got a 2-percent raise in January thanks to a deduction in employee Social Security contributions. For someone who makes $50,000/year, this was a $1,000 increase in take-home pay.

But, no matter what happens with the payroll tax holiday, the following are some things you can do before Dec. 31 to decrease this year’s tax bill.

Make charitable donations

For charitable donations to be claimed as itemized deductions on tax returns, they must be made to IRS-approved nonprofit religious, educational or charitable groups. The Salvation Army donation guide or H&R Block’s DeductionPro can be used to estimate the value of non-cash donations.

Offset capital gains with capital losses

After the Dow Jones Industrial Average hit a 30-month high Jan. 1, it was a roller coaster ride with investments losing and gaining again and again. Here’s some good news:

  • Those with a large net capital gain in 2011 could reduce their tax liability by selling stock before Dec. 31, if it would generate a loss.
  • Capital losses don’t just offset capital gains. If capital losses exceed capital gains, up to $3,000 of capital losses can be used to offset ordinary income, such as wages.

Look to the future and maximize retirement plan contributions

Taxpayers who have not contributed the maximum to their 401(k) may consider increasing contributions for the remainder of the year; contributions are made pre-tax, which reduces taxable income and potentially the overall tax bill.

Also, taxpayers eligible to deduct IRA contributions can make traditional IRA contributions to decrease 2011 taxable income until April 17, 2012, and thus reduce tax liability.

Pay it forward

Consider paying spring college tuition before Dec. 31 to take full advantage of the American Opportunity Credit on the 2011 return. Out of school but still paying for it? Make an additional student loan payment to claim the highest possible interest deduction (up to $2,500). Also, homeowners could pre-pay their December mortgage payment due in early January to claim as much mortgage interest as possible.

Go green at home and on the road

Home energy-efficiency improvements are eligible for a tax credit of 10 percent of the cost, with a $500 lifetime maximum. This includes doors, insulation, roofing, HVAC and non-solar water heaters meeting specific energy guidelines. The maximum lifetime credit for external windows is $200.

Taxpayers can claim a credit for the purchase of a neighborhood vehicle (e.g., low-speed four-wheel vehicle), a conversion kit or a plug-in electric drive vehicle, such as the Chevy Volt and the Nissan Leaf.

Claim casualty losses from disaster

Taxpayers in a federal disaster area who sustained disaster-related casualty losses (e.g., damaged or lost property) can claim their losses on a tax return for the year the disaster occurred or on the prior year’s return.

Get early access to W-2s

Use H&R Block’s free W-2 Early Access service to get W-2s before the Feb. 1 distribution deadline and get your refund up to three weeks earlier. Approximately 90 million taxpayers whose employers are among the 200,000 companies participating can use this service. Clients can elect to have their W-2s and other information sent directly to an H&R Block tax office.

So, you might have less spending money next year due to the possible absence of the payroll tax holiday, or you could get a small bump. Either way, if you need guidance about how to reduce your taxable income and tax liability, contact a H&R Block tax professional.