End of Year Tax Tips to Save Big in 2010

VIDEO: Mellody Hobson explains what you can do now to save a bundle on your taxes.PlayABCNEWS.com
WATCH Act Now for Big Savings on 2010 Taxes

Congress may have passed a new tax bill, but they're not the only ones preparing for tax season. There is still time to make changes right now that will save you a bundle on your 2010 taxes.

Mellody Hobson, president of Ariel Investments, appeared on "Good Morning America" to answer questions and share tips about what people can do by year's end to lower their tax bills.

Lower Your Tax Bill

Q: One of the big tax incentives that is expiring this year has to do with making your home green. How can people take advantage of this tax credit before it's gone?

A: The government introduced a tax credit for energy efficiency last year, but it will expire Dec. 31. If you are thinking of making an energy improvement soon, you must have it installed in your home by Dec. 31, Hobson said.

Click HERE for Mellody's web-extra tips.

If you do, you save money on your monthly utility bill and you'll get a tax credit equal to 30 percent of the cost, up to a maximum of $1,500, she added.

If you have used a partial credit, you can still use the remaining amount right up until the deadline. Qualifying jobs include the installation of insulation, energy efficient windows and doors, water heaters and roofs, among other things, she said. Only existing homes that are the applicant's principal residence quality for the credit. New homes and rentals do not, she said.

Click HERE for more information on how to claim the credit.

Q: Health care reform has been a hot topic this year. Is there anything in the bill that will affect my taxes?

A: Many Americans have flexible spending accounts (FSAs) through their employers. FSAs are accounts that allow you to set aside pre-taxed money to use on out-of-pocket health-related costs such as drugs, co-payments and other medical expenses. The downside is that you will lose any money you set aside and fail to spend.

Some companies have a Dec. 31 deadline so account-holders to use the money in their FSAs, while other employers allow until March 15, 2011 for the funds to be exhausted, Hobson said.

Either way, the health care bill now stipulates that, after Dec. 31, you may no longer use FSA funds for over-the-counter drugs -- such as aspirin – without a prescription, Hobson said.

Q:. Many Americans are struggling just to pay their bills on time. Can I save money on my taxes by paying bills early?

A: Hobson said people can save money on their taxes if they prepay some of their bills. For example, those who decide to pay their January mortgage in December can deduct the January interest payment this year.

If a property tax bill is due in January or February of next year, homeowners may also pay it this month and deduct it from their taxes for 2010, she said.

Those who are considering contributing to their child's 529 savings plan may consider putting in a little bit more before the end of the year. Many states allow parents to deduct their annual contributions up to a certain amount, she said. Before you contribute, make sure to talk to a plan provider to ensure the contribution is deductible, she added.

Q: The stock market has been very volatile over the past few years. If I have lost money, how does that affect my taxes?

A: The stock market has been on a wild ride this year, and although stocks have been up more than 10 percent this year, stocks are still more than 20 percent off their 2007 peaks, Hobson said.

If there are stocks that you no longer believe in, you may consider selling them before year's end. The IRS will allow you to deduct up to $3,000 of your total losses on stock sales each year, Hobson said. Any loss that is greater than $3,000 may be carried forward to future tax years, she added.

This can get a little complicated, so talk to your accountant before you decide to sell, she noted.

Q: As much as a quarter of all charitable gifts are made during the holiday season. How can I make the most of the tax deduction?

A: Donating money around the holidays has always been part of the fabric of American society, Hobson said. Those who are considering donating money should do it before the end of the year to deduct it from their 2010 taxes.

The catch is that you can only deduct your donation if you itemize your taxes on your tax return, and your donation must be made to an IRS-recognized 501c(3) organization in order for you to qualify for the deduction, she added.

Before you donate, ask if the organization is a 501c(3). You can confirm the nonprofit's status by reviewing the IRS's publication 78. It's available at www.irs.gov. Don't forget to save your receipts with any donation.

Also, remember that you can deduct the fair value of donated items, such as furniture and clothing. The IRS requires that any such items be in good conditions. Most people may have a hard time determining the fair value of their items, but there are websites – such as www.itsdeductible.com (from the makers of Turbo Tax) – that can help. These websites values the items based upon actual sales of similar items, she said.

You may even deduct the mileage – up to .14 per mile – that you drive to and from the place where you volunteer, she added.

Also, you are allowed to give any individual a tax-free gift of up to $13,000 a year (twice that amount if the donors are a married couple). The gift won't reduce your current taxes, but it will help someone else in need and they won't have to pay taxes on it, she said.

Web-Extra Tips

The end of the year is a great time to get your paperwork in order for your tax return. Make sure you collect all of your receipts and statements. Not only will this save you time while preparing your tax returns, it will also protect you if you are audited.

Although many people get excited by a large tax refund, what you are essentially doing is loaning the government money interest-free with each paycheck. Instead you should consider lowering your withholdings, so you get a larger paycheck and a lower refund. This way you get the money earlier so you can use your money now on whatever you want.

If you do not expect your tax rate to change in 2011 and you are self-employed, consider waiting until January to bill for your December services. This way you will not pay taxes in 2010 on what you earned in December. If you are expecting a bonus, try and see if your employer will pay the bonus after Dec. 31.

Click here to return to the "Good Morning America" website.