Your Year-End Tax To-Do List: A 5-Step Plan
Here are five things to do to uncover tax savings between now and New Year's Eve.
1. Figure Out Where You Stand.
The first key to successful year-end tax planning is getting a rough estimate of your income and deductions for the year. Your pay stub should give you a good idea of year-to-date gross income, as well as 401(k) contributions, flexible spending account money, and other tax-saving items. For deductions, look at your checkbook or bank account statements to see what you've given to charity throughout the year, and consult with your mortgage lender about getting information on taxes and mortgage interest.
Once you have an idea of your total income and deductions, you can estimate your tax bracket and get an idea of whether you'll want to itemize deductions to get a bigger tax break. That will help you determine which of the following moves will save you the most.
2. Look at Boosting Retirement Savings.
The single easiest way to get a bigger tax refund is to contribute to an IRA, 401(k), or other tax-favored retirement plan. For many taxpayers, putting money in a traditional IRA or 401(k) gives you a dollar-for-dollar reduction in taxable income. With contribution limits starting at $5,000 for IRAs and $17,000 for 401(k)s, you can put a lot of money aside all at once, if you haven't already done so.
3. Grab More Deductions (If You Itemize).
A lot of people look for deductions toward the end of the year, and giving to charity is one of the most popular. But the key to charitable giving is that you must itemize your deductions to get the tax benefits. If your standard deduction is bigger than your itemized deductions will be, then giving additional amounts to charity won't lower your tax bill, unless you donate enough to get you past that point. The same goes for many other popular deductions, such as medical expenses, real estate taxes, and state income taxes.
So, if you're close to the standard deduction limit, consider making both your 2012 and 2013 payments or contributions before the year ends. That will pull in two years' worth of deductions into one tax year and potentially allow you to itemize this year, while still allowing you to get the full benefit of the standard deduction next year.
4. Tread Carefully with Investments.
In most years, financial experts advise that you sell your investment portfolio's bad performers in December in order to maximize tax losses. With taxes on investments slated to rise sharply next year, that conventional advice has now been turned on its head, and some are actually advising people to accelerate gains into 2012. Doing so could save you plenty in the long run -- especially if you're in the upper tax bracket -- even as it increases your tax bill for this year.
Also, be on the lookout for special dividends from stocks you own. A number of companies are aiming to beat an anticipated rise in dividend taxes by making big distributions before the year is out, so be prepared if your stocks are making a large payout.
5. Make a Checklist.
Finally, even though you won't start getting tax forms until January, it's smart to know what to expect. You should expect to get your W-2 from your employer sometime in January, with tax reporting forms from mutual funds and brokers out by mid-February. If you don't get your forms within a reasonable period, contact your HR department or financial representative to track them down. With a checklist, you'll be able to file earlier and get your refund that much faster.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.