The golden rule for minimizing your tax burden and avoiding unpleasant surprises from the IRS this year — and any year for that matter — can be summed up with two words: PLAN AHEAD!
Setting aside some time now for end-of-year tax planning (in consultation with a tax specialist if necessary) can pay off in a big way on your 2011 tax returns. “The earlier, the better” when it comes to tax planning, says FPA member Irwin Gross.
To give yourself an edge come tax-filing time, consider the following eight tried-and-true planning steps now:
- “Start by reviewing your tax return from last year to gauge the extent to which your tax situation this year may differ (in terms of income, deductions, etc.),” suggests FPA member Laurie A. Siebert, CPA, CFP®.
- To capitalize on the advantages that may come with itemizing your tax deductions, consider bunching your deductions — for things such as mortgage interest paid, charitable contributions and medical expenses — in the current tax year. “Bunching deductions and filing an itemized return every other year is a strategy that can work for taxpayers who otherwise might not have enough deductions to justify filing itemized returns each year,” says Siebert.
- Take advantage of tax breaks that expire after 2011. Talk to a tax expert or do the research yourself at IRS.gov. An hour or two of your time can pay off in hundreds, even thousands, of dollars in tax savings.
- Be aware of, and ready to pounce on, other tax breaks for which you may be eligible, such as deductions for the state sales tax you paid over the course of the year, or the interest you paid on a home (or home refinance) loan.
- If you’re facing the prospect of paying substantial capital gains taxes, Gross suggests talking to a financial planner or tax expert about strategies to offset those gains by “harvesting” capital losses.
- Reduce your tax tab by paying certain taxes early. For example, paying real estate taxes for this year and next could net you a double tax deduction, plus a discount for paying early, notes Gross.
- If you’re paying college tuition with funds from a 529 college savings account, consider paying part of the tuition tab with out-of-pocket funds. That makes you eligible for the soon-to-expire $2,500 American Opportunity Credit for education-related expenses, while preserving 529 funds to use later, says Siebert.
- People 70 ½ and older can take advantage of a soon-to-expire “qualified charitable distribution” provision allowing them to donate all or part of the amount (up to $100,000) they’re required to take from their Individual Retirement Account (IRA RMD) directly to a charitable organization. That charitable distribution doesn’t count toward the taxpayer’s gross taxable income, explains Siebert, meaning it can reduce their income tax and social security tax liability.