Year-End Tax Planning For Individuals - Accelerating Deductions

Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax. Pay your entire property tax bill, including installments due in year 2013, by year-end. This does not apply to mortgage escrow accounts. Try to bunch "threshold" expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good. Tip: Now is the time to bunch deductible medical expenses. Medical expense deductions are 7.5% of AGI this year, but in 2013 increase to 10% of AGI. In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2012, depending on your situation. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest. Tip: Accelerating income into 2012 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year. Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due. On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method. Caution: The Alternative Minimum Tax (AMT) no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the AMT for 2012. Due to tax changes in recent years, AMT impacts many more taxpayers than ever before and, the tax is not indexed to inflation. As a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax. Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Note: The AMT "Patch" expired in 2011. As such, AMT exemption amounts have reverted to 2000 levels. For example, the AMT exemption amount for married filing jointly is $45,000 in 2012, down from $74,450 in 2011. Unless Congress takes action and enacts an AMT "patch" before year-end, AMT exemption amounts for 2012 are as follows: $33,750 for single and head of household filers, $45,000 for married people filing jointly and for qualifying widows or widowers, $22,500 for married people filing separately.