It's the end of December and we are still teetering on the fiscal cliff. As we wait for some sort of resolution from Congress, what should the average taxpayer being doing to get ready for tax season?
The most important thing to do right now is to pay attention. Keep an eye on Washington, D.C., the latest tax developments, and news and updates regarding the fiscal cliff. Most importantly, once a decision is made on how taxes will change, make an appointment with your tax professional and start getting ready to file your taxes. With all of the complexity surrounding taxes, engaging with both the tax preparation process and a tax preparer to guide you in the process is even more important than ever. It's never too early to get ready to file your taxes, and being engaged and organized will also help you prepare for any late changes.
To get started, gather all of your records, including a copy of last year's tax return. You can use the prior-year return as a guideline/checklist to make sure you include all income and deduction records for this year.
Here are some additional tips to help you reduce your taxes during the last few days of this year:
- Put more money into your 401(k) and your IRA: You can contribute up to $17,000, with an additional $5,500 allowed contribution if you are 50 or older.
- Pay your January tuition payment by Dec. 31: If you, your spouse, or your dependent are in the first four years of their undergraduate degree or certificate and attend school half-time or more, you may be eligible for the American Opportunity credit, which offers up to $2,500 of credit. However, keep in mind that the American Opportunity credit is scheduled to expire Dec. 31, 2012 and the replacement credit in 2013, called the Hope credit, only offers up to $1,500 and only pertains to the first two years of undergraduate studies, as opposed to four years.
- Clean out your closets, attic and garage: Donate clothing and other household goods that are in good or better condition. Doing so by Dec. 31 lets you increase your charitable contribution for 2012.
- Make the January payment on large medical expenses: Do you have a large medical expense you are making payments on, such as braces or surgery? If so, pay your January payment now; this lets you can claim the deduction this year. Beginning Jan. 1, 2013, the "floor" for the medical expense deduction increases to 10 percent of AGI (from 7.5 percent). The "floor" is the amount you must subtract from your total expenses to determine the deductible amount (with only the remaining expenses allowed as a deduction), so it will be more advantageous to claim these expenses in 2012 if possible.
- Make your January mortgage payment now: This lets you deduct your interest from the payment this year.
Yes, we are teetering on the fiscal cliff, but no matter what happens in the negotiations, don't delay. Tax season will come no matter what. The best thing to do now is to be prepared and take advantage of these last few days of the year to maximize your 2012 tax return.