Editors' pick: Originally published Nov. 11.
This late in the year, you should be hunting down tax deductions like a kid searches for hidden holiday gifts.
We're just weeks away from the end of 2016 and its tax year, but both ignorance and terrible record keeping may be preventing you from minimizing your tax hit. According certified financial planner Melinda Kibler of Palisades Hudson Financial Group in Fort Lauderdale, Fla., lost deductions can be the result of simple procrastination.
Take your charitable deductions, for example. Most people who itemize deductions underreport their charitable contributions, because they don't keep records throughout the year. Even though some of your deductions may seem small, they can add up to a big tax savings.
"If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible," she says.
The Internal Revenue Service allows taxpayers to deduct donations up to 50% of their adjusted gross income when those gifts are given to public charities or certain private foundations. Even for gifts to family or other non-qualifying foundations, the deduction can be as large as 30% of all adjusted gross income.
Of course, the more you have to give, the greater the tax benefit. For example, an individual in the 28% federal income tax bracket that makes a $500 charitable donation, will see their tax liability decline by $140 (28% of their tax bill). For wealthy individuals subject to either federal or state estate tax, the assets they give to qualified charities will escape the tax. With a top federal tax rate of 40%, $4 out of every $10 in assets subject to the tax will go to the government instead of to family members and other loved ones. Not only is the family losing that money, but it's losing a valuable opportunity to learn about how to manage whatever wealth remains.