What You Can Do Now

OK, it's the first week of February and the light bulb has lit up. You realize you have to deal with your taxes, but know you didn't plan for them.  You ignored them for about an entire year - since the last time you went through this ritual you hate.  Your first thought is probably, "oh ___!!" After that, you need to understand what you can do now to minimize your tax liability.

CASH BASIS TAXPAYERS ARE SCREWED, RIGHT?

No. But your options are very limited at this point in time. All individuals (with very few exceptions) are cash basis taxpayers.  That means you recognize income when you get the money and you get a deduction when the cash goes out.  The big exception to this rule is that the government allows you to make contributions to your IRA until April 15. If you have a profit sharing plan and put your return on extension, you have until October 15 to make your retirement contribution.  If your income falls into a certain range, you will also get a tax credit for making this contribution.  That's really huge - a deduction and a credit for the same dollars!  You can contribute up to $5,000 to your IRA ($6,000 if you are at least age 50).  Remember that the government is subsidizing the deductible contribution. The $5,000 doesn't really cost you $5,000 because it is reducing your tax liability.

CASH IS TIGHT, I JUST CAN'T DO THAN NOW

If you don't have the cash, here are some things to think about. Things happen during the year for which you already spent the cash. Now, see if you can use any of them to your tax advantage.

• Did you replace your hot water heater? Think energy credit.
• Did you replace windows or exterior doors? Think energy credit.
• Did you look for a new job? Think job hunting deductions.
• Did you start your own business? Think home office deduction.
• Do you have a child in college? Think education credit - for you OR the student.

If cash is tight, think about cleaning out your closets.  You can give your old clothes, toys, furniture, books, etc. to charity.  It won't get you the deduction for 2009, but you'll have this deduction in the bank for 2010.

Remember, even if you think you might owe taxes, prepare early. Find out what the damage is, see if you can mitigate it with any of the above and then plan for taking care of it.  Don't wait for the surprise on April 15.