Let your tax return be a lesson to you.
Next year at tax time, there may be no need to end up the way you did on taxes this year. Many people can improve the outcome with a little advance thought. You might be able to put more money into your pocket from each paycheck during the year or ensure that you write a smaller check to the IRS, or no check at all, when you sign your tax return at this time next year.
For example, if you receive a big tax refund this year, you probably sent too much each payday to Uncle Sam. You can fix that and have more spending money during the year. Simply go to your benefits office now and change the withholding form. See the effect on take-home pay by completing the questionnaire at www.tinyurl.com/irsquestionaire.
Or if you missed a great tax credit on your tax return this year because your income was too high, you might be able to adjust so you get credits worth thousands on your 2012 tax return. For example, if you are raising a child, there's a credit worth $1,000. If you are going to college or sending a child to college, there's another, up to $2,500. If you want to capture the credits for 2012, look for ways to cut your taxable income.
Accountants have many ideas, like deciding what year a person should receive a big bonus or adjusting what a small-business owner takes out of a business each year. But individuals have a lot of control, even if they simply rely on a basic paycheck. The easiest way to slice income for tax purposes is to contribute more of it to a 401(k)-type retirement plan at work or an IRA outside of work. If you set this up so a little money comes automatically out of each paycheck, it can feel painless.
Anything you save will reduce the income that gets taxed, and the tax reductions help you save more without digging deep into your pocket. Say, for example, you are in the 25 percent tax bracket and contribute $100 a pay period to your 401(k). You won't really be taking $100 out of your pocket, because the deduction you get on your taxes means your take-home pay goes down just $75. To see the impact, visitwww.tinyurl.com/takehomepaycalculator.
Still, cutting income to take advantage of favorite tax credits could end up being futile after the 2012 tax year. Many of the best credits families enjoy, such as the child tax credit or college credit, may be reduced after this year if Congress doesn't extend the so-called Bush tax credits that were enacted in the early 2000s. About $450 billion is at stake.
Given the uncertainty, financial advisers and accountants are having their clients make contingency plans, strategies they will put into action or abort depending on which way the politics takes the tax issue this year.
For the very wealthy, tax advisers are getting clients to get ready to give $5 million to heirs this year because they think a lifetime exemption on gifts might decrease to only $1 million in future years, said Anita Sarafa, a wealth adviser at JPMorgan Private Bank.
Certified public accountant Robert Keebler is encouraging affluent retirees to look ahead at spending needs and possibly pull money out of IRAs for 2013 needs in November or December of 2012, if they see higher taxes coming. That way they can pay federal taxes at today's 35 percent rate rather than a possible 39.6 percent next year. With taxable accounts, selling stocks, bonds, real estate or mutual funds at a 15 percent capital gains rate now might make sense if the money will be needed for a big expense such as college tuition in 2013, Keebler said. Another popular idea is to convert regular IRAs to Roth IRAs so taxpayers won't have to pay taxes on earnings withdrawn for retirement, and so they can pass Roths tax-free to heirs, Sarafa said.
Even timing charitable contributions becomes tricky, she said. If the highest-income taxpayers will have to pay 43.4 percent next year (personal income tax plus Medicare), waiting until then to make a charitable contribution could provide a more valuable deduction than doing it this year. Yet, Sarafa notes, "there is talk in Washington to make charitable deductions worth only 28 percent," so waiting might not make sense.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery."
You can act now to save more on taxes next year
Let your tax return be a lesson to you.