How can I reduce my taxes for 2011

Question

I am looking for options/steps I can take right now to reduce my tax bill for 2011. I am married filing separately ( cannot file jointly, as non resident spouse was working abroad in 2011 and including her worldwide income puts the tax bill through the roof).

Any suggestions, will be highly appreciated. Thanks.

To Chad's point

What I am asking for is any suggestion/ advice so that I can reduce my tax bill for 2011 ( evn though its 2012 already). Its just that I have to file married filing separately for 2011 ( see reason above) and was hoping to reduce my tax bill. I would have filed married filing jointly but cannot (see reason above).

Answer 1

At this point the only option left to influence your total tax bill is an IRA contribution (as long as its deductible). You can contribute to your IRA on the account of the previous tax year until the tax day.

Otherwise you're pretty much locked in, the year ended and you can't change the numbers in any other way. If you itemize - make sure that you take all the possible deductions, remember to write down all your charitable donations, make sure you deduct the state taxes and SDI (if you're in California), and that's about it. If you don't itemize - calculate how much you'd owe had you been itemizing, to make sure you're not missing anything. Any decent tax software (Turbo Tax or H&R Block) would have done it for you already.

There are no miracles.

Answer 2

Charitable donations can, at the organization's prerogative, be applied to the previous calendar year. If you are close the organization, they have the ability to do this, but you should be asking yourself if you really need the deduction for 2011, or simply overall.

On a grander scale, you should remember that reducing your taxes by undertaking a financial activity should only be a marginal concern.

Imagine, for example, that your marginal tax rate is 28%, and for purposes of this example does not change. If, for example, you had a home equity line of credit, you could simply choose to pay more or less interest (by holding a larger balance, of say $2000 at 5% interest for a year), and that would have an effect on your taxes. If you chose to pay $100 more in interest, you would in fact, reduce your taxes by $28. If that $100 in interest lets you do something that is important (maybe invest it, use it, whatever), than by all means, you should take the $28 in tax savings, thereby lowering your cost of using that money.

But, why would you pay a bank $100 just in order to avoid paying the federal government $28?

Any deduction, when your marginal tax rate is less than 100% will necessarily cost you more than the savings. (Tax credits are 100%, and so would be different).

The point is not that you shouldn't be looking for tax advantages, but rather that a tax advantage should never be the sole cause of an action. Funding your IRA has a tax benefit. By all means, you should do it - but do it for the retirement reason, not the tax reason. Going to college has a tax benefit. By all means, you should do it - but do it for the education, not the tax benefit. And, holding a mortgage on a private residence is probably the cheapest use of capital you will have access to - but again, do it because you want the house, not the tax benefit. The tax benefit is there should be a reward for activity the government wants to encourage, but should never be the sole reason for doing it.

If you're doing an activity already, and need to worry about timing, that can often be worked out. But remember that over time, it all comes out in the wash. Choose the deductions you are already doing, and you'll be maximizing your money altogether.