Late summer can be the best time for last-minute tax planning because you still have several months to meet end-of-the-year deadlines that can minimize your tax bill in the spring. Follow these five tips and you might even get some money back from Uncle Sam.
Bulk up your retirement contributions. You can contribute up to $17,000 to your 401(k) in 2012; for those 50 or older, the limit is $22,500. If you're nowhere close to that amount, consider ramping up your contributions to take advantage of tax-advantaged accounts. The same goes for Roth IRAs and traditional IRAs. If you want to max out your retirement savings, now is the time to start putting more money away. (You can contribute up to the 2012 limit until April 15, 2013.)
Check out any expiring benefits that might apply. As a result of the upcoming "taxmageddon," which refers to anticipated tax changes next year that will result in tax increases for most Americans (unless Congress takes action), certain deductions and credits are set to expire at the end of the year. That means 2012 could be your last chance to take advantage of the Educator Expense deduction, tuition and fees deduction, and sales tax deduction, among others.
Delay deductions. Because tax increases are likely in the future, tax experts recommend saving big deductions until next year, if possible. So if you're planning to make a sizable charitable contribution, for example, you might want to hold off for the sake of your tax bill. Similarly, if you're flexible about when you receive income, you might want to get as much in the bank before December 31 so it counts as income in 2012, before any potential tax increases.
Check that you've been paying enough taxes. If you received income beyond your usual paycheck because of freelance work or income from a side business, you might end up owing a lot of money in April. You're also at greater risk if you got married this year and earn a similar, relatively high salary to your spouse. That's because of the so-called marriage penalty, which often means dual, high-earning couples owe more when they file taxes jointly than they did when they were single.
People who earn significant chunks of their salary in cash also need to make sure they're putting enough aside to pay the appropriate amount of taxes in the spring. The IRS keeps a close eye on people in professions that pay in cash, such as waiters, by using formulas that estimate expected income. If you report less, you could be flagged for an audit—not something you want.
A big tax bill can not only shock your budget—you might owe the government additional fines, too. Check to see if you've been paying roughly the correct amount of taxes by reviewing your payroll stubs or other documentation. If you think you're going to owe money, prepare by starting to save now.
Keep track of important receipts. If you run your own business, are self-employed, or have been spending money on educational costs to boost your career, then many of your expenses may be tax-deductible. Make sure you put your receipts in an easy-to-find filing system so you can claim them when you file your taxes next year. If your employer offers flexible spending accounts for healthcare costs, be sure to keep eligible receipts for doctor visits, pharmaceuticals, and other health-related costs. You often have until April 15 to file those claims.
Talking taxes might not be as fun as planning your summer vacation, but it can pay off just in time for spring break.