Tuesday, August 7, 2012, AM | 1 Comment
There are a few things you can do now to save on taxes later when it comes to file your tax return. Don’t procrastinate. The earlier you start, the better. Experts tell us that the average American must work 107 days to earn enough to pay federal, state, and local taxes in 2012.
Out of 365 days in a year, 52 weeks times 2 days weekend gets you 365 – 104 = 261 working days – 107 days for taxes = 154 days worth of income in your pocket.
You must do tax planning now to save later…
First off, surveys suggest many Americans do little in the way of tax planning even though they pay almost 30% of their income in taxes.
Tax planning is not that complicated. It usually involves reviewing tax benefits and implications of your income, expenditures, investments and retirement plans that you can tweak at least once a year if not more frequently.
The important thing is to realize how best to maximize the benefits in the most tax-efficient way. Planning may also include taking a close look at your income tax return for the previous year.
Several ideas come to mind for your tax planning checklist this year and every year:
Review your retirement plan
Almost all blogs and TV channels have been talking about retirement plans. Why not review yours now. If you are able to contribute more, why not do it now.
For some reason, if you don’t have a retirement plan, consider starting a 401(k) or IRA. If you want to start an IRA, remember the tax differences between traditional and Roth IRAs.
One important thing to remember is to try to avoid early withdrawals, which often involves additional taxes and 10% penalty if you are not 59 1/2 years old yet.
Standard or Itemized Deduction
You have claimed standard deduction last year. If your financial status has changed, for example, you have significant expense in medical care, or you bought a house and you have mortgage interest along with state and local property taxes.
If you have to claim itemized deductions, then it’s advised to review your expenses against IRS Publication 17 which is not published yet for 2012. But you can get a head start by looking over Publication 17 for 2011.
Consider paying an additional mortgage payment before December 31, 2012. That extra payment could make it more advantageous to itemize deductions. Keep receipts and detailed documentation for all deductions throughout the year.
Check tax return filing status options
If you have qualified dependents, you may qualify for more than one status.
Check your federal withholding
Experts say withhold just enough tax to meet your tax liability. Withhold too little and you’ll owe taxes plus possible penalties and interest. You can change withholding anytime of year by submitting a revised Form W-4 to your employer.
I am personally not against withholding too much. If you did that, you will be refunded every cent above and beyond what you owe in taxes. Some experts say you would be giving interest-free loan to Uncle Sam. So be it. What interest do you get these days on your savings, practically nothing?
Have paid tuition?
The benefit for The American Opportunity Tax Credit is scheduled to expire after 2012, so take advantage now. If you know you would come short of the $2,500 maximum credit amount by December 31, consider paying some of your 2013 spring tuition before year’s end to make up the difference. Get more information in IRS Publication 970.
Update your will
If your will includes property, update the financial and family information and evaluate how scheduled tax changes will impact the value. The federal estate tax exemption for 2012 is $5.12 million, taxed at 35 percent. After 2012, the exemption will drop to $1 million, taxed at 55 percent.
In a Nutshell
Experts tell us seventy-seven tax breaks expired at the end of 2011.
Past performance of Congress suggests that it would not do anything before the election. May be it will extend some tax breaks and then again may be not after the election.
- Aug 9, 2012: It Is Never Too Late For Tax Planning – Doable Finance | Planning For Retirement