4. Maximize your IRA tax benefits. You have until the tax-filing deadline April 15 to contribute to an individual retirement account, but start planning before the year is up. The amount you can contribute to an IRA has increased $500 this year. It's now $5,500, or $6,500 if you are 50 or older. (The contributions are tax-deductible, for the most part, but the deductions can be limited if you have a workplace plan, depending on your income level.) As part of your year-end check, "make sure you are putting the maximum into workplace savings plans that have a company match," DuBoff says. That's free money.
5. Prepare for the so-called Medicare surtax. This is a new tax that will hit upper-income payers. It will tax net investment income, meaning dividends or capital gains, with an additional 3.8 percent on investment income for people who make over $200,000 if they are single, or $250,000 for married filers. If you are in this income bracket and plan to take capital gains, consider the impact of this new tax before you do. "Harvesting capital losses is a common year-end strategy, but it is more important this year to minimize the 3.8 percent Medicare payroll tax on investment income," says financial planner Jeffrey Christakos of Westfield Wealth Management.
6. Figure out that messy alternative minimum tax so you can finally forget about it. This provision "hits particularly hard those taxpayers who have not done any tax planning," says Nina Olson, the IRS's National Taxpayer Advocate, in her annual report calling for its repeal. Getting it wrong can trigger fines and unexpected taxes. Congress took some action to soften the provision at the start of the year, effectively keeping the provision from hitting middle-income taxpayers.
What is this much-misunderstood tax provision? The AMT is a separate tax you must calculate that figures your tax without adding in often-used deductions. It was instituted decades ago as a way to limit the overuse of deductions. Starting this year, it will have an inflation index so that middle-income earners will be less vulnerable. But you may still need to figure it out on your taxes this year.
(The back-of-the-hand calculation on who pays: Everyone gets an AMT exemption on income of $51,900 for individuals and $80,800 for married joint filers. Then, you apply a rate of 26 percent if your income is below $179,000 or 28 percent if you make more. If the calculation is more than the tax you figured on your old 1040, you must pay the difference.) The Tax Policy Center of the Urban Institute and Brookings Institution estimates that 4 million people will still pay AMT, but the American Taxpayer Relief Act of 2012 spared an estimated 23 million who would have paid under existing rules.
The AMT is complicated – a 55-line calculation on your tax form. If you figure out that piece of your tax puzzle this year, you might not have to worry about it again, maybe ever, thanks to the new inflation index fix. It's a good thing to ask a tax advisor.
Do-it-yourselfers will be happy that electronic returns can actually make filing taxes easier. The online calculators help get you through some of the rough spots. But e-returns are difficult for those who itemize deductions. Consider getting a professional to help if that's your plan. Remember, there have been 4,680 changes to the tax code since 2008, or one per day, according to the Taxpayer Advocate's Office. That's a lot for an amateur to keep up with.
The IRS now has an immense amount of personal data on you, and it is starting to cross-check your personal charge card records and brokerage transactions by computer. Keeping good records is more important than ever. It might be a good year to get a comprehensive review with a tax advisor to go over every item ahead of time.
Ever try to get an accountant's attention in April? Now is the time to get the best help so you are ready for the new tax year.