The Santa Claus Deduction

There’s a reason Santa does all his work right before year-end.  Since he’s on a cash basis only (okay, milk and The Santa Claus Deductioncookies and cash, probably), he has mastered the first rule of smart tax planning  – MAXIMIZE YOUR DEDUCTIONS & MINIMIZE YOUR INCOME.  So he pays all his elves by Christmas Day, delivers the goods on the 25th and then waits for the payments (in the form of good deeds, I’m sure) to dribble in over the course of the next year.   He didn’t get to be Santa Claus for nothin’…

But you don’t have to have a little round belly and  rosy cheeks to do some smart tax planning of your own.  As a follow-up to last week’s tax tips, here are a few more year-end strategies to consider so you, too, might have some extra reindeer food when April 15 rolls around.

1. Prepay Bills.

I know, I know, why would you EVER want to pay for something before you had to?  Well, by increasing your itemized deductions, such as state & local income taxes, interest payments & real estate taxes, you will be reducing your taxable income this year.   Accelerating deductions and deferring income is a fundamental tenet of tax planning.  Of course, if you feel that your situation is going to change next year and those deductions will be more helpful then, ignore this advice.

2. Make Some Charitable Donations.

This is the time of year that charities make the big push for your money, so be a little Santa-like yourself.  A couple of things to remember though –

  • Give appreciated property – you can deduct the full value but you don’t have to recognize the capital gains.  What a deal!
  • Cash out depreciated property, then donate the cash – this way you get a capital loss deduction AND the charitable deduction.  What a deal!
  • If you are thinking of making this charitable contribution from your IRA funds this year -STOP.  Don’t take the distribution in cash and then make the donation, give the donation directly from your IRA.  That way you don’t have to pay taxes on the distribution.  Especially this year, when you don’t have to take a distribution at all.
  • If you have had a windfall this year, consider setting up a Donor-Advised Fund to take a big deduction this year, but spread your contributions over several years.   For more on that, check out Franklin Templeton’s website for a peek at how this all works: http://tiny.cc/Vggcu
  • Finally, if you’ve committed a certain amount to your favorite charity and  are now finding yourself short on cash, consider spreading your contribution over two years. Make half the payment in December and half in January.  Many charitable organizations are on a July to June fiscal year, so it can help you keep your promises without affecting their fundraising numbers.

3. Give a gift to those you love

Okay, only do this if you are trying to get some money out of your estate in a systematic way OR funding your kid’s college education plan OR you are just feeling Santa-like.  You can personally give up to $13,000 per person per year.  If you are married, your spouse can also give up to $13,000 per person.  Yes, $13,000 – the gift tax exclusion amount went up in 2009.

4. Be smart about medical expenses.

If you participate in a Medical Care Plan, where you make pre-tax contributions for future medical expenses (not a Health Savings Plan, however), make sure you max out your expenses before year-end.  These plans have a “use it or lose it” policy, so accelerate discretionary reimbursable medical/dental/vision expenses to use up all the dough.  You can never have too many pairs of glasses, right?

But if you know that next year you are having that elective surgery you ‘ve been putting off, consider delaying any other doctors visits, medical expenses, etc. right here at the end of the year,  so that you can rise above the AGI floors.  Didn’t know you were standing on an AGI floor?  Well, visit www.irs.gov to get the definition, the minimums, etc.

And about that HSA plan, it, too, is pre-tax, so make sure you are maximizing your contribution before the end of the year.  Unlike the Medical Care Plans, you won’t lose what’s left over  AND you can normally invest it, so it’s all good.

5. Consider a Roth Conversion in 2009

For those with Adjusted Gross Incomes over $100,000, you will have to wait to do this until 2010, when that limit goes away.  But if you make less than $100,000 now, consider converting your Traditional IRAs to Roth IRAs this year.  It may make sense, since some IRAs may still be down from past years…

With all this smart tax planning, I bet  Santa’s angling for retirement in the Bahamas…The Santa Claus Deduction

About the author

Lea Ann Knight, CFP®

Lea Ann is the Principal of Garrison/Knight Financial Planning as well as the creator of the financial literacy site, Financially Fit After 40. She also writes a monthly column as the Money Expert for All You Magazine.

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