Top 5 Year-end tax moves
December 21, 2012
Contribute to your 401k. Money you contribute to your plan (if it’s not a Roth) is excluded from your income, lowering your tax bill.
If you’re not yet on track to max out your contributions by year’s end, you can direct some extra dollars to your retirement plan during your last few pay periods — or, if you get a year-end bonus, use that to fatten your savings.
Safeguard your refund (by shrinking it). When you file your tax return each year, the amount of tax withheld from your paycheck or submitted through estimated quarterly tax payments ideally should match the amount of tax you owe. In reality, that seldom happens.
In order to get less tax money withheld from paychecks, file a revised Form W-4 with your employer, and the more “allowances” you claim, the less tax will be withheld.
Penalty-proof your refund. If you expect that you’ll owe money when you file your 2012 tax return early next year, you can avoid an underpayment penalty by boosting your withholding now.
In most cases, you can also escape a penalty by prepaying 100 percent of last year’s tax liability. Note, though, that if your 2011 adjusted gross income topped $150,000, you’ll have to prepay 110 percent of last year’s tax liability to avoid a penalty.
Boost your 2012 income. Deferring discretionary income, such as year-end bonuses, is a popular tax strategy when tax rates are expected to remain the same or decline. This year, though, high-income taxpayers may want to accelerate discretionary income to avoid a tax hike created by the healthcare reform law where starting in 2013, taxpayers will pay an additional .9 percent Medicare tax on income over $200,000.
— Courtesy of MSN Money