With Christmas over and the end of year almost here, today is the perfect time to start thinking about your taxes. Use these tips now so you can save on your tax return in April.
Because of escalating gas and energy prices, the federal government is giving tax breaks to encourage people to conserve energy.
Specifically, if you do things to make your house more energy efficient -- such as installing new windows or buying new appliances -- you get a break on your return. Taxpayers can deduct as much as 10 percent of $5,000.
Additionally, if you buy a hybrid car you can get a tax benefit of up to $2,600.
Pay Your Mortgage One Day Early
Most people pay their mortgages in the first few days of the month. If you make your January mortgage payment one day earlier on Dec. 31 instead of Jan. 1, you can save money on your 2006 tax bill.
This is how it works. Let's say you have a home worth $150,000, you have a 6 percent interest rate and your mortgage payment every month is $750. By paying your mortgage one day early on Dec. 31, you will get a $187 tax interest deduction on your return.
Put More in Your 401(k)
The money you invest in your 401(k) retirement plan is pretax savings. This is really important because there are two tax benefits to 401(k) plans.
First, saving for retirement is always a good thing. At the same time, you lower your tax bill because the money you put in your 401(k) account does not count against your earned income. So the more money you put away, the less your return will be.
An individual can contribute up to $15,000 per year into a 401(k) . If you're over 50, the "catch up" provision allows you to put in $20,000 per year.
Any extra money you can put into your 401(k) in December will go a long way toward helping you with your retirement, as well as lower your tax obligation.
This year, $92 million worth tax returns and refunds went unclaimed because they either got lost in the mail or people moved. That $92 million belongs to about 95,000 people in the United States. The average person is owed about $1,000.
If you are one of those people who didn't get the refund that you believe you deserve, call the IRS. You have until Dec. 31 to claim the money.
Start Working on Your Return Now
Start to gather the paperwork you need for your tax return. Although the holiday season can be hectic, the last couple weeks of the year are really slow at work for most people. You can use this time to get some paperwork done.
The IRS will let you start filing your taxes as early as mid-January. The faster you file, the faster you will get your refund.
Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.