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7 things you can do now to lower next year’s tax bill

(Photo from Flickr used under Creative Commons license from user <a href="" target="_blank">401 (K 2012</a> )

Tax season is coming up, and it isn’t expected to be an easy one.

For the first time, people will have to report their health insurance status on their tax returns. As it happens every couple of years, there are a slew of tax breaks that will go away next year if Congress doesn’t act to renew them. The whole thing is enough to potentially push back the start of the tax filing season — not to mention delay tax refunds.

Most taxpayers prefer to have someone else handle the math and the paperwork. But even if you’re working with a pro, there are things you should get in line now to minimize your tax hit, and maximize your refund, come April. “The important thing is to see how you’re doing,” says Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block Tax Institute.

1. Estimate your tax bill. Your accountant might help you do this, but if you don’t have one you can use online estimators offered by tax preparation companies like TurboTax and H&R Block. This way you’ll know to start saving now if you have a big tax bill due in April, says Melissa Labant, tax specialist at the American Institute of CPAs in Washington. It also gives you time to make tweaks so that you can reduce how much you owe.

2. Max out your retirement accounts. An easy way to lower your tax bill is to put more money into a tax-deferred retirement account. You might be able to contribute a little more than usual into your 401(k) in December than you did in earlier months, as long as you aren’t going over the annual contribution limit of $17,500. (People age 50 and up can save an additional $5,500 in catch-up contributions. And those contribution limits are going up by $500 each next year.) Savers can make IRA contributions for this year up until April 15, but they may not be deductible if they also have access to a workplace retirement account.

3. Write off your investment losses. This year is turning out to be a pretty good one for stocks so far, but that doesn’t mean that all stocks are gaining. If you are planning to sell some stocks that have gained in value, you may also want to sell shares that have dropped in price so that you can offset those gains, Labant says. You can then write off an additional $3,000 in investment losses to offset your taxable income, she says. But don’t sell investments just to change your tax bill, she says.

4. Give more to charity. If you have a cause you care about, the end of the year can be a good time to make another donation, says Sara Montgomery, philanthropic services specialists for Wells Fargo Private Bank. By now, you have a better sense of what your income will be for the year and if you can afford to give a little more, she says. If you’ve also estimated your tax bill, you might have a sense of whether giving a little more might make a difference on your tax return.

There are plenty of ways to do this, of course. Aside from writing a check, some people might think about donating appreciated stock directly to an organization, Montgomery says. Then it’s up to the group to sell the stock or to keep it. You would likely get to deduct the market value of your holdings up to 30 percent of your adjusted gross income, she says.

5. Prepay some expenses. Some people might get more out of certain tax deductions by prepaying some of next year’s expenses this year. For instance, if you pay January’s mortgage payment in December, you can increase the size of your mortgage interest deduction, Perlman says. The same goes for prepaying medical bills and prescriptions if you’re planning to deduct medical expenses. But don’t forget to keep next year in mind, she warns. If you got a promotion and a raise at the end of the year, it might be better to save those bigger deductions for next year when you’ll be earning more and could face a bigger tax bill, Perlman says.

6. Check your health insurance. People who bought health insurance on the new state and federal insurance exchanges will receive a new tax form this year called the 1095-A, says Lisa Greene-Lewis, an accountant and tax expert with TurboTax. These forms should lay out how much a person paid in premiums and if they received a subsidy tax credit to help lower insurance costs, she says. People who didn’t have insurance this year will need to pay a penalty or show that they were exempt from having coverage this year.

Some exemptions will be automatic, but some people may need to show if they faced a financial hardship, Greene-Lewis says. People who went without coverage may want to sign up for a plan during this open enrollment period, which starts Nov. 15 and runs through Feb 15, to avoid having to pay a penalty next year. (The penalty is jumping to a minimum of $325 from $95 this year.)

7. Max out pre-tax accounts. At this point, you might be rushing to buy contact lenses or new glasses to spend down the remaining cash in your health flexible spending account — or the money is long gone. If you are dealing with an FSA, find out if your employer offers a grace period for when the money can get spent. Some companies will give you until March of next year to use the cash and others will let you roll over up to $500 into next year. For a health savings account, which can get rolled over from one year to the next, you might want to make a last-minute contribution this year as a way to reduce your taxable income, Perlman says. Wherever you stand, try to learn from this year to adjust how much you put into the account next year. It could lead to hundreds, if not thousands of dollars in tax savings.

Read More:

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