1. Get in the giving mood
Since the holidays are the time for giving, add your name to your tax gift list by donating to your favorite charity. As long as you itemize, you can deduct gifts of cash or goods to help reduce your tax liability.

Another nice thing about giving to charities, aside from the satisfaction you get from helping others, is that unlike medical and miscellaneous deductions, your contributions don't have to meet a percentage threshold. Your entire goodwill helps your tax situation as well as the recipients.

If one of the items you plan to donate is an auto, then you definitely want to do it by the end of 2004. This is the last year that you can (easily) get the Kelley Blue Book value for a donated vehicle. Because some taxpayers cheated when valuing their automotive gifts, federal lawmakers approved stricter donation rules that take effect on Jan. 1, 2005. But if you donate a car (or boat or other vehicle) now, you still can use the existing, more lenient guidelines to determine your 2004 return's deduction.

Don't have a car to give away? Many charities are just as happy to accept run-of-the-mill items, such as clothing and household goods. To keep the Internal Revenue Service happy, make sure you claim the fair market value for your gifts. Bankrate has some worksheets to help you figure the appropriate amount.

You also might be able to reap additional, and potentially sizeable, tax savings if your giving is less traditional.

Did you do volunteer work for your favorite nonprofit this year? While you can't deduct the value of your donated time, you can write off your mileage if you used your car to help out the cause -- for example, delivering meals to shut-ins. Deduct your volunteer travel at 14 cents per mile.

Or consider donating stock that's appreciated in value but no longer fits your investing plan. Instead of selling it, give it to your favorite charity, which can then sell the stock without any tax consequences and use the money for its projects. As for you, you'll sidestep capital gains taxes plus be able to deduct the asset's market value at the time you made the gift. Just make sure the donated stock is one you've owned for more than a year and that it has gained value while you owned it. It doesn't do you any good to give away a stock that's lost value since you can't deduct that loss.

2. Evaluate your portfolio
A stock loss under different circumstances, however, could be beneficial at tax-filing time.

Many investors use the last month of the year to rebalance their portfolios or simply to sell stocks or funds that have turned a nice profit. Remember, though, that your investment savvy will cost you in capital gains taxes. You do get some tax consolation if you sell assets you owned for at least 366 days. These are long-term capital gains, taxed at 15 percent or 5 percent vs. ordinary income tax rates that go as high as 35 percent.

Even without selling anything, you could face a tax bill if you own mutual funds. With an individual stock, you decide when you buy and sell, giving you some tax control. But with mutual funds, assets are sold throughout the year and a portion of any gain is passed along to you, the shareholder, as capital gains distributions. The good news: Capital gain distributions are treated for tax purposes as lower-taxed, long-term gains.

You can lessen a looming investment tax bill by clearing the financial dogs from your portfolio by Dec. 31. Rather than hold onto a perennially poor-performing stock in the hopes it will recover, sell it at a loss. Sure, it's never easy to take a loss on an investment, but it could actually pay off from a tax standpoint: Uncle Sam lets you net losses against gains. Plus, you can use up to an additional $3,000 in capital losses to reduce taxable ordinary income. If your bad stocks cost you more, you can carry the excess into future tax years.

3. Home sweet tax breaks
A little year-end tweaking when it comes to tax-deductible home costs also can cut your impending IRS bill.

Your Jan. 1 mortgage payment really represents interest for the month of December, so make the payment before the 31st. By accelerating the payment you get an additional deduction this tax year for the interest paid.

Some tax professionals say you can simply mail your extra mortgage payment by Dec. 31 and have it count. However, if you actually get your payment to the bank by the last business day of the year (or a day or two early), the extra interest will show up on the lender's official paperwork. And that means no curious tax examiner will question any difference between the amount you claim on your Schedule A and what your lender reports on the Form 1098 that you (and the IRS) will get in late January with details of your deductible mortgage activity.

If your year-end mortgage statement doesn't reflect the extra payment's interest, go ahead and deduct the correct amount on your tax return and attach a statement explaining why your number, not the lender's, is accurate.

Remember, though, that while an early payment will give you 13 mortgage interest amounts to deduct this year, it means that on your 2005 taxes you'll only have 11 (or 12 if you pay a little early next December, too). So before you send off that check, make sure you really need the added deduction amount on this coming return.

The same early-bird approach also applies to deductible property taxes. If your county or municipal tax collector will take your tax payment (or part of it) now, pay it to accelerate the tax benefits. Of course, this only works if you pay real estate taxes yourself, rather than having your lender pay them from an escrow account.

While you're making early property tax payments, don't overlook any other state or local taxes you can pay now and deduct against your upcoming federal tax bill. This works especially well if you pay estimated income taxes to your state treasury. By making the final quarterly payment in December instead of the January due date, you shift the tax benefit into this year.

A word -- actually, three words -- of warning about shifting state tax payments: alternative minimum tax. This parallel tax system was devised more than 30 years ago to guarantee that wealthy filers paid their fair share to the IRS. But nowadays, more middle-class filers are finding the AMT applies to them, in large part because the alternate system isn't designed to keep up with some inflation. Under the AMT, some usually acceptable tax breaks, such as state and local income taxes as well as real estate and personal property taxes, aren't allowed. Before you shift payment of extra taxes into this year, make sure you won't face an AMT bill where they wouldn't be deductible.

Early mortgage payment could cut your tax bill
http://www.bankrate.com/brm/itax/tips/20031212a1.asp

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4. Maximize medical deductions
You've got another Dec. 31 deadline to meet if you want to get the most out of itemized medical deductions.

Medical and dental expenses can help take a chunk out of your tax bill, but only if you have enough of them. IRS rules say you can't count these deductions unless they exceed 7.5 percent of your adjusted gross income. If you make $50,000 that means you get no tax benefit until your medical costs exceed more than $3,750.

You still have time to reach the earnings cutoff. If you've been putting off that elective surgery and can afford it, schedule the procedure before the year's end to bump your medical bills up to the deductibility threshold.

The eligible expenses must be those not covered by any insurance or other reimbursement plan, such as a flexible spending account (more on this in Tip 7). And make sure there's a solid medical reason for the procedure. Cosmetic nips and tucks don't count here!

But you can include any dependent's medical treatments, as well as the installation costs of special, doctor-prescribed therapeutic equipment or medically necessary improvements to your home. And if you must travel for medical treatments, you can deduct the drive at 14 cents per mile, along with any parking and tolls you paid along the way.

5. Make early miscellaneous payments
Miscellaneous deductions -- union or professional dues, job-related educational expenses and subscriptions to business publications -- also can help cut your taxes.

They, too, must meet a percentage of your adjusted income to count. In this case, it's 2 percent.

If you're near the threshold this December, prepay some of these expenses. Buy the uniform you were going to get in January, extend your business journal subscription another year, pay the registration fee for that job-related computer class you plan to take in February. Bunching these miscellaneous expenses and paying early could save you some tax bucks.

Here again, remember the AMT. Miscellaneous deductions aren't allowed if you have to figure your taxes under the alternative method.

6. Teachers, go shopping!
Up to $250 you spend on materials to make the learning experience better for your pupils is tax deductible. And teachers aren't the only ones eligible for this bit of a tax break. The educator expenses deduction also can be claimed by teacher aides, counselors, even principals, as long as they work at least 900 hours in a public or private school for kids in grades kindergarten through 12.

Even better, you don't have to itemize to take this break. It's available directly at the bottom of the long Form 1040, and the amount you claim helps reduce your income amount. Less income usually means a lower tax bill.

All you've got to do is buy $250 worth of classroom supplies by Dec. 31.

7. Flex your spending account muscle
Do you have a flexible spending account at your job? Does it still have money in it? Does your benefit year operate on a calendar basis? If you answered "yes" to all these questions, then you're running out of time to maximize this valuable fringe benefit.

Flexible spending accounts allow workers to put away pretax cash to help pay out-of-pocket child or dependent care expenses or uncovered health costs. Not only can these accounts help you meet extra costs, the account contributions are taken out of your paycheck before taxes are calculated.

These accounts are particularly beneficial when your medical expenses don't add up to the percentage-of-income threshold discussed in Tip 4. Plus, the IRS has decided that you now can use the account money to pay for over-the-counter medications.

But there's a downside. If you don't use your account money in the benefit year that it's contributed, it can't be carried over to the next year.

While your eventual tax bill won't be affected if you don't spend all your flexible account money, you'll be wasting this tax-advantaged option if you don't spend it in the next few weeks. So don't lose it, use it!

8. Tend your company retirement plan
Give yourself a holiday gift of future financial security by starting or adding to retirement savings accounts. In many cases, you get an immediate tax break and begin building a nest egg sooner.

If you're eligible to participate in your company's 401(k) retirement plan and its rules allow you to enroll now, do it. If you're already contributing, think about upping the amount. The money you contribute reduces your taxable income.

Since it's so late in the tax year, your increased retirement account contributions probably won't help you cut your coming tax bill. But you'll definitely have a head start on reducing next year's taxes.

This strategy also applies if you work for yourself, either full-time or as a side business to supplement your salaried job. Dec. 31 is the last day you can open a Keogh or solo 401(k) retirement plan. These savings vehicles are the self-employed equivalents of corporate retirement programs and will help whittle down the taxable amount you brought in via your own enterprise.