Let your tax return be a lesson to you.
Next year at tax time there may be no need to end up the way you did on taxes this year. Many people can improve the outcome with a little advance thought.
You might be able to put more money into your pocket from each paycheck during the year or ensure that you write a smaller check to the IRS, or no check at all, when you sign your tax return at this time next year.
For example, if you get a big tax refund this year, you probably sent too much each payday to Uncle Sam. You can fix that and have more spending money during the year. Simply go to your benefits office now and change the withholding form.
Or if you missed a great tax credit on your return this year because your income was too high, you might be able to adjust so you get credits worth thousands of dollars on your 2012 return. For example, if you are raising a child, there's a credit worth $1,000. If you are going to college or sending a child to college, there's up to $2,500. If you want to capture the credits for 2012, look for ways to cut your taxable income.
Accountants have many ideas, like deciding what year a person should receive a big bonus or adjusting what a small-business owner takes out of a business each year.
But individuals have a lot of control, even if they simply rely on a basic paycheck. The easiest way to slice income for tax purposes is to contribute more of it to a 401(k)-type retirement plan at work or an IRA outside of work. If you set this up so a little money comes automatically out of each paycheck, it can feel painless. Anything you save will reduce the income that gets taxed.
Cutting income to take advantage of favorite tax credits may be futile after the 2012 tax year. Many of the best credits families enjoy, such as the child tax credit or college credit, may be reduced after this year if Congress doesn't extend the so-called Bush tax credits that were enacted in the early 2000s. About $450 billion is at stake.
Given the uncertainty, financial advisers and accountants are having their clients make contingency plans, strategies they will put into action or abort depending on which way the politics takes the tax issue this year.
Certified public accountant Robert Keebler is suggesting that individuals consider selling before the end of the year stocks or funds that have appreciated significantly since purchased. This will allow taxpayers to take advantage of today's zero to 15 percent capital gains rates rather than the 20 percent rate, plus a 3.8 percent surtax on high-income earners, for next year. The 3.8 percent Medicare surtax is being challenged. The 20 percent capital gains rate will depend on Congress.
Timing charitable contributions becomes tricky, said Anita Sarafa, a wealth adviser at JP Morgan Private Bank. If the highest-income taxpayers will have to pay 43.4 percent next year (personal income tax plus Medicare), waiting until then to make a charitable contribution could provide a more valuable deduction than doing it this year. Yet, Sarafa notes, "there is talk in Washington to make charitable deductions worth only 28 percent," so waiting might not make sense.