Your tree is trimmed, your gifts are wrapped and your plane ticket home has been booked. Now you just have to figure out how you’re going to pay for your holiday merriment when the bills come due next year.
One potential source of cash is your tax refund. In 2010, the average refund was about $3,000. Here are some steps you can take through Dec. 31 that could increase the size of the check you get from the IRS:
•Tighten up your home. If drafts are making your holiday candles flicker, consider adding some insulation to your home before the end of the year. You may qualify for a tax credit worth up to 10% of the cost, up to a maximum of $500. Other products that qualify for the tax credit include weather stripping and spray foam or caulking designed to seal air leaks.
The credit is a lifetime maximum, so if you’ve claimed $500 or more for energy-saving home improvements since 2006, you’re out of luck, says Harris Abrams, senior tax analyst for Thomson Reuters.
•If you have a child in college and haven’t taken full advantage of the American Opportunity Tax Credit, pay the spring tuition before Dec. 31. This credit provides eligible families with up to $2,500 per student for the first four years of college. You can claim up to $2,000 in qualified costs and 25% of the next $2,000.
•Defer income until 2012. This isn’t usually an option for employees on salary, but taxpayers who are self-employed or earn freelance income have more flexibility, says Bob Meighan, vice president of consumer advocacy for TurboTax. Bill your customers in late December so the payments won’t come until 2012. That allows you to postpone paying taxes on the money .
This strategy makes sense only if you expect your tax bracket to remain the same or decline next year. For most taxpayers, that will likely be the case, Abrams says. The Obama administration has proposed a tax surcharge to pay for the cost of extending the payroll tax cut, but it would be limited to earnings above $1 million.
•Accelerate deductions. All things being equal, it’s better to claim tax-saving deductions sooner rather than later. You can achieve this by paying some deductible expenses before year’s end. For example, paying state income or property taxes that are due in January before Dec. 31 will allow you to deduct them on your 2011 tax return.
Having medical procedures performed before year’s end could also lower your tax bill. Unreimbursed medical expenses aren’t deductible unless they exceed 7.5% of your adjusted gross income, so most taxpayers don’t qualify for this tax break. But hard times may increase the number of taxpayers who are eligible, Meighan says. If your income declined this year, either because you were unemployed or your salary was cut, you may qualify, especially if you had a lot of medical costs.
•Donate to charity. If you itemize, making charitable donations before Dec. 31 will lower your 2011 tax bill. Expecting a bonus in January? Use your credit card to make the donation before year’s end. As long as you charge your contribution before Dec. 31, you can deduct it on your 2011 tax return, even if you don’t pay the bill until next year, Abrams says.
Taxpayers who are 70½ or older can donate up to $100,000 directly from their individual retirement accounts. The donation isn’t deductible but won’t be included in your adjusted gross income, which could make you eligible for tax breaks tied to your AGI. In addition, the donation will be counted toward your required minimum distribution.
•If you live in a state with no income tax, take advantage of the deduction for state sales taxes before it disappears. The state sales tax deduction will expire on Dec. 31 unless Congress votes to extend it. Thinking of buying a car next year? If you live in one of the nine no-tax states, consider buying it before year’s end so you can deduct the sales tax.
In recent years, Congress has voted at the last minute to extend the sales tax deduction, along with other expiring tax breaks, but in light of rising concerns about the federal deficit, taxpayers shouldn’t assume that will happen this year, Abrams says.