As another calendar year comes to a close, if you are like me, you may be contemplating what you would like to do differently next year. Here is something that we all should add to our list – Think about how we can perk up our tax situation for 2012.
The year-end is a great time to take an overview of our taxes and see if any changes need to be made. With that in mind, and based on what we see here at the IRS, here are three areas of potential improvement.
Compare your standard deduction with probable itemized deductions
The IRS allows you to take either a Standard Deduction, based on your Filing Status, or Itemized Deductions, which are tailored to your personal expenses. The deduction you opt for equates into a dollar amount you can subtract from the income you will be taxed on, so the challenge of course is to choose the deduction that will yield the most advantage.
For tax year 2011, the Standard Deduction rate will be $5,800 for single filers and double that for joint filers. Starting next year, consider shifting your deductions to the itemized category, or at least keep track throughout the year and see which is better. You may be surprised at the tax dollars you could save.
The following are just a few of the itemized deductions the IRS allows:
- Almost all necessary medical, dental and vision expenses are included, along with the amounts you pay for most health insurance plans.
- The interest paid on your home mortgage loan, as well as most real-estate taxes.
- State taxes paid on your wages. As an alternative, you can deduct actual state tax paid on most purchases.
- Charitable contributions. If you are considering a large contribution, why not hold off and make it in January? It may be just enough to punch you into the itemized category.
For more information on Itemized Deductions, review the 2011 Instructions for Schedule-A.
File your taxes timely
You would be surprised at how many taxpayers neglect the timely filing of their tax returns. A good portion of those individuals may already owe back taxes, and the regrettable result is that they allow another year to lapse.
Start the new year off with a determination to set matters straight with the IRS. This includes making certain that your tax return is in the mail by April 17, the due date for 2011 taxes. The IRS charges a large monthly penalty (five percent of your tax due) for failing to file on time, and almost any repayment agreement you may make with the IRS is contingent on the fact you are current in your legal filing requirements.
Adjust your withholdings
A startling numbers of individuals owe taxes for a very correctable reason: under-withholding on their income. If you prepare your taxes and see that you have a bulky tax bill owed, take immediate steps to prevent the same thing from occurring next year.
Remember that some of the credits or exemptions you were previously carrying on your tax return may no longer qualify. For example, the Child Tax Credit requires a qualifying child to be under the age of 17 at the end of the taxable year. If you can no longer take that credit, that’s a least $1,000 in after-tax credits that you are losing out on and may need to make up for elsewhere.
An employer will accept a new Form W-4 withholding certificate at any time. Use this form to increase the amount you have withheld from your pay each pay period. If you are self-employed, you likely will need to start making estimated tax payments if you have not already done so.
See IRS Publication 505, Tax Withholding and Estimated Tax, for more information.