You may have developed a strategy to lower your federal income tax, but have you done everything you can to reduce your state income tax? Here are a few tax tips to consider before the end of the year:
1. Maximize college savings deductions
Nearly every state has a 529 college savings plan, and most of those states offer deductions and credits for contributing to the plan. Arizona, Kansas, Maine, and Pennsylvania even allow you to deduct contributions to 529 plans from any state. If you don't have a 529 account, consider setting one up. According to the IRS website, "you can set one up and name anyone as a beneficiary — a relative, a friend, even yourself." If you already have a 529, contribute the maximum deductible amount for your state before the end of the year. Please note that there is no federal deduction for 529 contributions. Check your state tax authority's website for details on the deductibility of 529 contributions in your state.
2. Make some home improvements
Consider making your home more energy efficient this year. Not only will it lower your utility bills, but many states have tax incentives for energy efficient home improvements. Most states offer rebates, tax credits, or deductions for things like solar panels, geothermal water heaters, or just energy efficient appliances. You can see a list of the tax incentives for each state on the Department of Energy’s DSIRE website.
3. Avoid penalties for underpaying estimated taxes
Make sure you have sent out all of your estimated payments. This is especially important if you have lived, worked, or earned income in more than one state. Some states require you to pay taxes on all income you made while living in the state, while others tax income you made in the state whether you lived there or not. Check into the rules for each state you’ve lived or worked in during the year and make sure your payments are covered. If you have lived and worked in only one state, your paycheck withholding is probably sufficient. However, if you have made significant income from another source besides your job, it’s a good idea to make sure your estimated payments are covered.
4. Don't give the state an interest-free loan
While you definitely don't want to underpay your estimated taxes, you don't want to overpay either. Run through a mock tax return for your state using your full income for the entire year and what you've paid in so far. If you’re set to get a good sized refund, think about adjusting your paycheck withholdings for the rest of the year. There’s no sense in giving the state a interest-free loan in the form of unnecessary tax payments. Put that money in your pocket instead. Just don’t forget to re-adjust your withholdings on January 1st.