Use Your 2011 Return to Create Smart Tax Strategies for 2012 and Beyond


Once they’ve been paid, people might not want to deal with last year’s taxes anymore. But last year’s tax returns can be helpful for the future.

“Going over your 2011 tax return is the first step in thinking about your 2012 taxes,” says Anna K. Pfaehler, CFP, with Palisades Hudson Financial Group. “You can learn much that will help guide your strategy.”

Don’t act yet on expiring Bush tax cuts
If Congress doesn’t act, Bush-era tax cuts will expire at the end of 2012. Basic income tax rates will rise, as will taxes on long-term capital gains and stock dividends.

“There’s absolutely no certainty about what will happen,” Pfaehler says. “We probably won’t know until the last minute. Stay informed, but it’s too early to act. You don’t want the tax tail wagging the investment dog.”

Plan to cut AMT
If your 2011 return shows a good income and hefty deductions for state and local taxes, you’ll likely be hit with the complex alternative minimum tax in 2012.

People paying AMT should consider delaying their last quarterly payment for estimated state income taxes until January of the following year. If you’re subject to AMT you will not benefit from the federal tax deduction for state taxes paid, says Pfaehler.

By making the payment in January, you’ll postpone the federal tax deduction until the following year — and if it turns out you’re not subject to AMT the next year, you’ll come out ahead.

Does your tax return show “private activity” income from municipal bonds? Such income counts toward AMT.

“If you’re paying AMT, you should avoid income from these bonds,” she says. “Muni bond and money market funds that are AMT-free because they don’t invest in private-activity bonds can be a good choice if you’re subject to the AMT.”

Fund your FSA or HSA
If your employer offers a flexible spending account, you can cut your taxes by contributing pretax dollars to it. However, you must use the money this year or lose it, so make sure not to contribute more than you’ll spend, Pfaehler cautions.

If you have access to a health care savings account, you can get a deduction of up to $3,100 a year for a single person or $6,250 for a family. The money will grow in the account tax-free, and it can be withdrawn tax-free whenever you need it to pay for medical expenses.

529 plan can cut state taxes
Investing tax savings in a 529 college savings plan is good move for parents and grandparents, Pfaehler says. Contributions to a 529 aren’t federally deductible, but help you save on future taxes because the proceeds grow tax-free. In many states, 529 contributions are deductible for state income taxes if you invest in that state’s plan.

Boost IRA and 401(k) contributions
Look at your contributions to retirement plans in 2011. Did you put in as much as you can afford?

“If you’re not contributing as much as you should to your IRA, Roth IRA, 401(k), 403(b) or other plan — depending on what’s available to you — this is the year to step up,” she says.

The opportunity comes from the Social Security tax windfall — 4.2% this year instead of the normal 6.2%, which it will return to in 2013.

The government estimates the average employee will take home $714 more this year. The cut applies to the first $110,100 of wages and self-employment income, so the maximum tax break is $2,202 per person.

There are plenty of options to invest those savings in a tax-advantaged plan, Pfaehler says.

In 2012 you can stash up to $17,000 in your 401(k) or 403(b) — up from $16,500 last year — plus an additional $5,500 if you’re 50 or older. All contributions cut your taxable income, both federal and state, she says.

If you’re already contributing the maximum to your work-based plan or don’t have one, using your tax cut to fund a Roth IRA is a great choice because the money grows income-tax-free forever.

If you make too much money to contribute to Roth IRA (or get a deduction for standard IRA contributions), you can always make nondeductible contributions to your traditional IRA, Pfaehler says.

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