10 tax time bombs to defuse now
By Kay Bell • Bankrate.com

There's always too much to do and not enough time to do it during the hectic holiday season. But you need to add one more item to your must-do list: a quick tax checkup.

Spending a few minutes now on your taxes can pay off at filing time. Defuse these 10 tax time bombs by Dec. 31, and you won't have to call in an accounting SWAT team on April 15.

1. Home sweet tax breaks
A little year-end tweaking when it comes to tax-deductible home costs can cut your impending Internal Revenue Service 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 2004 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.

2. Evaluate your stock portfolio
The market has been less turbulent than in past years, but you still need to keep an eye on your holdings and their tax implications.

Investors got some good news this year when law changes cut the long-term capital gains rate to 15 percent for assets sold May 6 or later. (Property sold before then is taxed at the slightly higher old capital gains rates.) That same legislation also reduced taxes on dividends. Previously, dividend earnings were taxed at the ordinary income rate, which could be as high as 35 percent; now most dividends are taxed at 15 percent.

Even if you didn't sell any holdings, you could could face some tax consequences 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 gain distributions.

The good news: Capital gain distributions are treated for tax purposes as lower-taxed, long-term gains. The bad news: Some distributions may appear on year-end statements as paid before the May cutoff date, meaning not all your earnings will get the new lowest tax treatment.

You can lessen a looming investment tax bill by letting the financial dogs out of your portfolio by Dec. 31. Rather than hold onto a poorly performing stock in the hopes it will recover, consider selling it at a loss. Uncle Sam lets you net losses against gains. Plus, you can use up 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.

Just don't try to get sneaky in your asset shifting. If you think the stock will soon recover and you want to buy it back, you'll have to wait. Under wash sale rules, the IRS could nail you for taking a tax loss on a stock that you buy back within 30 days.

3. 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. Itemized gifts of cash or goods can be deducted to reduce your tax liability.

Sure, lower tax rates have devalued somewhat the tax benefits of run-of-the-mill charitable gifts such as cash or donated goods. But you still might be able to realize sizable tax savings if your giving is less traditional.

Consider donating some stock, especially if during your portfolio review you discovered one you've held a while but which is struggling to gain value in the current market. If you sell that appreciated -- but currently disappointing -- stock, it would cost you capital gains taxes. But if you donate it, you would be able to deduct the current market value of your stock gift before it drops any lower.

You also can deduct charitable travel, at 14 cents per mile, if you used your vehicle to do volunteer work. Or even donate the old jalopy itself. And unlike medical and miscellaneous deductions, there is no percentage threshold to meet on contributions.