End of Year Tax Planning, What to Do with that Bonus?
December brings holiday cheer and the end of the 2008 tax year. Not exactly "visions of sugar plums dancing," but certainly in the dreams of most adults as 2008 comes to a merciful close. How can you position yourself this month to maximize your 2008 tax savings?
Let's take a look at some opportunities to trim that 2008 tax bill or find smart places for that year-end bonus. Yes, according to a Towers Perrin survey, nearly two-thirds of US companies are still sending out their end-of-year bonuses.
- Paying down mortgage debt. Making an early January payment in December or a lum sum payment against principle can give your 2008 tax bill a break. It can also be an alternative investment to a poorly performing stock market and historically low savings rates. With the Federal Reserve taking benchmark rates to nearly zero, CD, money market, and savings rates are paying very little return. Of course, with a fixed rate loan this is a short-term strategy to reduce taxes, but a long-term strategy to reduce interest paid and the term of the loan--your monthly mortgage payment will be unchanged
- Paying down credit card debt. Paying down debt is always a great risk-free return. Nothing can demonstrate that faster than getting rid of high interest rate credit cards. This plan has two distinct benefits: 1) it rids you of 10-20% in credit card interest charges, and 2) paying down credit card balances can improve your credit score, qualifying you for better interest rates.
- Building up reserve funds. If you have little or no debt to pay-down consider accumulating a six month liquid reserve fund. Nothing gives the consumer more strength in this market than cash. This gives you alternatives to tapping into credit cards, home equity loans, and other borrowings. If faced with a temporary job loss or reduction in pay this extra cash can stabilize your household without getting into a debt crisis. Cap your emergency-reserves in cash, savings, and money markets at about six months. More than six months in these low interet bearing accounts can disadvantage you against inflation in the long-run.
- Funding retirement accounts. If you are getting that year-end bonus you may consider pumping up your Individual Retirement Accounts (IRA) or 401(k). This will give you significant tax advantages for that end of year income and help you invest in the many bargains a tough 2008 stock market has given you.
Whether you are looking for smart savings or tax breaks for that little extra cash from 2008 you need to get it allocated soon.