Year-end tax tips for LEOs
It’s that time of the year again. The holidays are here, and we’re all thinking about which gifts to buy, holiday menus, and how we’re going to pay for it all! We become so involved with the holidays that we forget that it’s also the time of the year to maximize our tax returns. It only takes a little time and some good habits to maximize your tax return.
First, get organized. Get a large envelope or folder and keep it where you sort through your mail every day. Place every piece of mail that says “important tax documents enclosed” into that envelope – keep in mind that all your relevant tax information doesn’t arrive in your mailbox on the same day. This will make your life so much easier, and your tax preparer much happier. You won’t be searching for everything right before the tax deadline in April.
Next, make sure you keep your last pay stub of the year. We all know that we’ll need it for our tax return, and yet all together too many of us relearn every year that getting a reprint from the payroll section can be a painful experience. It has all the tax information not on your W-2 such as union and association deductions, political donations, 401(k) and deferred compensation contribution amounts, and other valuable tax deduction information. It’s one your best sources of tax deductible items.
We’re all in the spirit of giving during the holiday season. So this is a great time to give to your favorite charity. But remember this is the holiday season. People who work at these charities are busy and as distracted by the holidays as we are. So before you write that check, call the charity and ask them if you can donate using a credit card (as long as you pay it off when the bill comes in). If you write a check, there’s a chance it won’t be cashed by the end of the year, and you could miss out on the deduction. If you’re donating clothing, make sure it’s usable. The Pension Protection Act of 2006 stipulates that everything must be in "good used condition or better."
Does your department offer a 401k plan or a deferred compensation plan? This is the time to make sure you put as much as you can afford into the plan. These plans are tax deferred, so you pay no taxes until you use the money. This is a great way to save money for retirement, and to reduce your gross taxable income. If you can save $100,000 in one of these plans over the course of a career, that could translate into $1000 a month of income for one hundred months.
If you prepay some of your 2008 bills in 2007, you'll get to write them off this year. If you are a homeowner, you can make your January mortgage payment in December, giving them one more month of interest to deduct.
Do you plan on sending your children to college? A 529 plan is a great way to save for this expense. Your money grows tax-deferred and earnings on your withdrawals are exempt from federal income tax when used for qualified education expenses. Many states allow parents to write off contributions up to a certain dollar amount. New York State, for example, allows each parent to deduct $5,000 from state income taxes ($10,000 for a married couple filing jointly). If you don’t know if your state offers a 529 plan deduction, ask your tax advisor or check out savingforcollege.com. This site is a great resource for understanding these plans.
If you contribute to a Flexible Spending Account, check on your balance and use up any remaining money. Pre-tax funds contributed to an FSA can be spent on eligible expenses incurred during the tax year. For Medical FSAs, this would be a good time to find those receipts for co-pays and deductibles, to stock up on regularly used prescriptions, or get a routine physical or dental exam. Non-prescription and over-the-counter medications qualify for reimbursement from a medical FSA. Funds not spent by the end of the year are forfeited to the plan administrator, unless your agency adopted the “grace period,” which ends March 15th of the following year. Check on those rules before the end of the year, and plan to act accordingly.
Most of all, organization is the key to maximizing your tax return. Every January start a new file for the new tax year. It’s easy to do. Each time you incur a job or business related expense like ammunition, uniforms, equipment, etc., take the receipt and file it away. Being organized can save you hundreds of dollars a year on your return.
I wish all of you a healthy and happy holiday season. Stay safe.
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