Year-end tax planning is stressful under ordinary circumstances, and
this year is anything but ordinary. Unless Congress reaches an agreement
by December 31, tax rates on wages and investments will rise, the
exemption from the estate tax will shrink, and dozens of tax breaks will
disappear. Without a compromise, nearly 90% of Americans will pay higher taxes next
year, and the average household’s tax bill will increase by $3,500,
according to an analysis by the Tax Policy Center.
The most likely fix is a temporary extension of the current tax rates,
but the odds that a lame-duck Congress will reach a deal are fading. With that in mind, focus on these year-end tactics that will trim your tax bill no matter what Congress does.
1.Pay into your 401(k) or similar employer-based retirement plan. Money you
contribute to your plan (if it's not a Roth) is excluded from your
income, lowering your tax bill.
If you're not yet on track to max out your contributions by year-end,
you can direct some extra dollars to your retirement plan during your
last few pay periods -- or, if you get a year-end bonus, use it to
fatten your savings.
This year, workers can contribute up to $17,000 to employer-based plans. Workers 50 and older can contribute up to $22,500.
2. Cut your tax refund The majority of Americans are addicted to refunds. More than 75% of U.S.
taxpayers give Uncle Sam an interest-free loan year after year, with an
average refund of about $3,000 -- that's $250 per month. Wouldn't you
rather get your money when you earn it instead of waiting a year for a
refund? What’s more, that fat refund represents a security risk --
identity thieves have been filing fraudulent returns and stealing the
There's an easy fix. Just file a revised Form W-4 with your employer.
The more "allowances" you claim on the W-4, the less tax will be
If your current financial situation is similar to last year's, just use our Tax Withholding Calculator.
Answer three simple questions (you'll find the answers on your 2011 tax
return), and we'll estimate how many additional allowances you deserve
-- and how much your take-home pay could rise.
3.Boost Your 2012 Income Deferring discretionary income, such as year-end bonuses, is a popular
tax strategy when tax rates are expected to remain the same or decline.
This year, though, high-income taxpayers may want to accelerate
discretionary income to avoid a tax hike created by the health-care
reform law. Starting in 2013, taxpayers will pay an additional 0.9%
Medicare tax on income from wages over $200,000 ($250,000 for married
couples.) Of course, if tax reform leads to lower rates, deferring
income would still make sense. But that may not happen right away: rate
cuts in the Tax Reform Act of 1986 didn’t take effect until 1987 and
4. Plan Your Itemized Deductions If tax rates increase next year, deductions will be more valuable. That
would seem to argue in favor of postponing your charitable gifts until
Much depends, though, on your personal situation. If you expect your
income to drop next year -- you plan to retire, for example -- the
deductions will probably be more valuable this year, no matter what
happens with tax rates.
And for high earners, there’s another twist. Before 2001, the tax code
limited itemized deductions and personal exemptions for taxpayers whose
income exceeded a certain threshold. The Bush tax cuts phased out those
limits and repealed them in 2010. The reductions are scheduled to be
reinstated in 2013. If Congress doesn’t act, high-income taxpayers could
lose up to 80% of their itemized deductions. For that reason, a
charitable gift made in 2012 may produce greater tax savings than one
made in future years, even if tax rates increase.
You may want to pay other deductible expenses before year-end, such as
your January mortgage, 2013 real estate taxes and fourth-quarter
estimated state income taxes. Be careful, though: If you're a candidate
for the Alternative Minimum Tax, some of those deductions could be
To take advantage of the 0% capital-gains rate for 2012, your taxable
income can't exceed $35,350 if you are single; $47,350 if you are a
single head of household with dependents; or $70,700 if you are married