It’s Too Late for Your 2011 Taxes- Start Planning Now for Your 2012 Taxes
As much as you’d like to, it’s too late to rewrite history on your 2011 taxes—what’s spent is spent (although you do have until April 17th to stash more cash in a traditional IRA to save on taxes, if you meet income requirements). The good news is that you’ve still got loads of time in 2012 to make smart tax decisions, from stowing money in tax-deferred accounts to tracking expenses to selling things at the right time. Here’s what the experts recommend.
Adjust your withholding.
Did you get a huge check back from last year’s taxes? That’s not as great a thing as you’d think—you’re essentially making an interest-free loan to the government. “Many people get large refunds because too much is subtracted from their salaries,” says Julian Block, a tax attorney in Larchmont, NY. “Some people do this to force them to save money, but most people do it because they don’t know any better.” Use the IRS’s Withholding Calculator to determine whether you should fill out a new W-4 form for your employer. Christi Lardy did this last year, after she bought a house in Portland, OR. “Getting into the house cost more than I projected,” she admits. “I changed my withholding so I got more during the year to pay bills.”
Max out your 401(k) contributions.
Want to save on taxes? The more money you put into tax-deferred accounts, like a 401(k), the less you’ll have to pay Uncle Sam come April. At the very least, contribute enough to get your full employer match, if there is one. “That’s free money that your employer is giving you, so take advantage,” suggests Craig Harris, manager of the national tax department for Liberty Tax Service.
Value your charitable donations.
The next time you drop off a bag of old clothes at your local Goodwill, catalogue its contents. “And don’t just guess at the value of the goods,” says Fran Coet, a CPA in Westminster, CO. Use a valuation guide from Goodwill or the Salvation Army to put a dollar figure on your donation—you might be surprised by what it’s all worth. If you’re using your car to travel to and from a donation center, don’t forget to deduct mileage at 14 cents per mile. Learn more about getting the most of your charitable tax deductions, plus find out the best places to donate.
Keep records of tuition payments.
If you’re currently in college (or your kids are), look into the American Opportunity Tax Credit. “You can receive credit for up to 100% of the first $2,000 in expenses, fees and tuition, and 25% of the next $2,000 in education expenses,” says John Hewitt, CEO of Liberty Tax Service. It can be claimed for the first four full years of college education—per student. If you or your children aren’t eligible, you may instead be able to take the Lifetime Learning Credit, which can refund you up to $2,000 for qualified education expenses. If you think either credit applies to you, keep receipts and documentation for tuition, fees and required course materials. You can actually get a credit on your 2011 taxes if you paid tuition or other qualified expenses last year, as long as you have the right paperwork. Schools will typically send you a 1098-T tax form for tuition and fees paid, but receipts for books and other required materials are up to you to provide.
Check your state’s 529 advantages.
If you’re socking money away for your kids’ college education, you might get a tax break for using your state’s 529 savings plan. “Most, but not all, states have a deduction if you contribute to the plan,” says Mark Joseph, a financial planner in Reston, VA. “You could get a couple thousand dollars in deductions on your state taxes.”
Time your foreclosure or short sale.
If you’re in dire housing straits and there’s a foreclosure in your future, you may want to get it done in 2012. Ordinarily, when you have debt cancelled (such as the remaining balance on a mortgage), it’s treated as taxable income, but the IRS is cutting taxpayers a break through the end of this year. “No taxes will be levied on up to $2 million dollars for married taxpayers filing jointly, and up to $1 million for a married taxpayer filing a separate return,” says Hewitt. Unless the government extends it, this benefit will expire in 2012.
Sell your winners.
This could be the year to offload long-term investments that have gone up in value. “We have a very low capital gains rate now,” says Jackie Perlman, principal analyst of the Tax Institute at H&R Block. “But those rates are scheduled to shoot up in 2013.” More specifically, you’ll pay a maximum rate of 15% on long-term capital gains this year, but as much as 20% next year. And if you’re in one of the bottom two tax brackets, your rate will go from 0% to 10%.
Track your job-searching expenses.
Save receipts from your job hunt in a safe place, because you may be able to deduct certain expenses. The requirements: You should be looking for a position in your current occupation, and there can’t have been too much of a break since your last job. (So if you took a year off for school, say, you can’t deduct the costs of your employment search afterward.) “You can deduct expenses from traveling to and from interviews, staying in hotels, mailing resumes, making copies and hiring a headhunter,” says Josh Barger, vice president of tax services for Foundation Financial Group in Jacksonville, FL. The catch: You can deduct only expenses that exceed 2% of your adjusted gross income. But if you’re traveling heavily—or are unemployed and not making much—it may work. And if you move more than 50 miles away for a new job, keep receipts for mileage, movers and hotel costs. You don’t even have to meet the 2% threshold to deduct them.
Choose home equity debt.
If you’re carrying a balance on a credit card or a car loan and you’ve got equity in your home, consider taking out a home equity line of credit and using that to pay down your debt. “You’ll usually get a lower rate on the home equity line and the interest is tax deductible,” says Joseph. “It’s a complete homerun.” There are limits to the interest deduction based on the fair market value of your home and the balance on your mortgage—check out IRS Publication 936 for more details. And don’t run up balances in the meantime; the idea is to lower your interest rate and pay off your debt, not to continue living above your means.
Use your flexible spending account (or sign up for one).
Many employers offer flexible spending accounts (FSAs) that allow you to use pre-tax money to pay for healthcare and childcare expenses. If you’re participating this year, make sure you spend everything in it—FSAs are use-it-or-lose-it accounts, so you’ll be out any cash you didn’t claim by December 31st (or March 15, 2013 at many companies). Even though FSAs are limited to prescription-only drugs—no over-the-counter items without a doctor’s note—there are ways around this. “I asked my acupuncturist to write a prescription for over-the-counter supplements so I could submit the expenses through my FSA,” says Denise Winston of Bakersfield, CA. “I just explained what I needed and asked her to do the paperwork. This nets a savings of about $400 per year.” If you’re not signed up, make sure you opt in for 2013 during your company’s open enrollment period, which is usually in the fall. Benefits won’t start until January 1, 2013, but then you can pay for up to $5,000 in childcare costs and $2,500 in medical costs with pre-tax cash.
