Every year around this time, we hear about the same old things we should do by December 31 to save money on our taxes the following April. In this article, we'll provide some lesser-known tips and strategies for last-minute tax savings. We'll also share some arguments against taking commonly recommended measures like paying property taxes and the January mortgage bill in December. (For more suggestions, read 10 Money-Saving Year-End Tax Tips.)

TUTORIAL: Personal Income Tax Guide

Bunch Related Expenses into One Year
Some deductions aren't available unless your expenses in that category exceed a certain percentage of your income. For medical expenses, it's 7.5%; for job expenses and certain miscellaneous deductions, it's 2%.

Here's an example of how this system works. If your income is $50,000 and you have $5,000 in qualified medical and dental expenses, you don't get to deduct $5,000 from your taxable income; you only get to deduct the expenses that exceed 7.5% of your income. So, 7.5% of $50,000 is $3,750, so you can deduct $5,000 - $3,750, or $1,250.

It's better to be able claim something than to miss out on this deduction entirely. So, December is a good time to look at your actual medical expenses for 2011 and your anticipated medical expenses for 2012.

If you're close to crossing the 7.5% threshold for 2011, move your purchases of eyeglasses, dentist and doctor visits, surgical procedures and other medical and dental expenses to December 2011 to gain a tax deduction, advises Scott M. Estill, author of the book "Tax This! An Insider's Guide To Standing Up To The IRS" and a former senior trial attorney for the IRS. Likewise, if you have few medical and dental expenses for 2011, defer your purchases until 2012.

Numerous medical costs are tax-deductible, including LASIK eye surgery, doctor-prescribed weight loss programs, smoking cessation programs (but not patches or gum) and capital expenses for ramps, railings and other features installed in a home to accommodate disabilities, says John T. Hewitt, founder and CEO of Liberty Tax Service. (For related reading, check out Tax Deductions You May Be Missing.)

"Don't overlook medical mileage to and from doctors, hospitals and the pharmacy at 19 cents a mile from January 1 to June 30 of this year. The rates increased to 23.5 cents a mile from July 1 to December 31 of this year," he adds.

As for bunching your expenses, "The same idea works for miscellaneous itemized deductions, including investment advice, tax preparation costs, certain legal fees, safe deposit box rentals and so on," says Estill.

Consider Next Year's Tax Brackets
Before bunching expenses together, taxpayers should consider their overall tax brackets for 2011 and 2012, Estill says.

"For instance, if I know my income will go up in 2012 and thus I will be in a higher tax bracket, it may make sense to wait until 2012 to take the deduction because it will be worth more to me as a percentage of my income," he says.

If you jump from the 15% bracket in 2011 to the 28% bracket in 2012, your deductions will be worth 13% more in 2012, for example. A major tax bracket change might apply to you if your spouse was unemployed for most of 2011 but recently got a new job, or if you were a student in 2011 but will start working full time in 2012, among other possible scenarios.

"Likewise, if my income is expected to go down in 2012, it may make sense to try to accelerate the purchases into 2011," Estill adds.

Beware the Alternative Minimum Tax
The common advice to shift expenses from January to December to get the tax deduction a year earlier can backfire if you end up being subject to the alternative minimum tax (AMT).

What is the AMT? According to the IRS, "The tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax." (To learn more, read How To Cut Your Alternative Minimum Tax.)

Determining if the AMT applies to you is tricky and may require professional tax assistance. If the AMT does apply to you, you'll need to rethink your tax minimization strategy. "If you are subject to AMT, the benefit of being able to deduct property taxes disappears. It may be more advantageous to wait until next year to make the payment. Make sure you consult with a tax professional before you assume prepayment will result in income tax savings," he adds.

The same is true of state income taxes for the fourth quarter of 2011 that you might elect to pay in December instead of January, says Estill.

The Bottom Line
Year-end tax planning isn't as simple as it seems. Rather than scrambling to reduce your taxes in December, a better strategy is to consult with a tax professional to develop an ongoing plan that you can implement over the course of the entire year, and change along the way if your income or expenses don't meet your predictions.

Related Articles
  1. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  2. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  3. Professionals

    Advisors: Warn Clients About These Audit Triggers

    There are several factors that may increase the risk of an audit, especially with high-net-worth clients.
  4. Professionals

    3 States Where Taxes Can Hammer Retirees

    Knowing which states ding retirees with the highest tax implications should be part of your retirement research.
  5. Professionals

    Best Ways to Avoid RMD Tax Hits on IRAs

    If you want to avoid hefty tax penalties, read this cheat sheet on IRA required minimum distributions.
  6. Retirement

    Top Tips for Minimizing Taxes on Social Security

    Social Security benefits are taxable under certain circumstances. Here are some ways retirees can lessen the tax burden.
  7. Professionals

    How to Help Retirees Manage Taxes on Distributions

    There are many variables when it comes to helping retirees manage taxes on distributions. Here's what advisors need to consider.
  8. Taxes

    Employers: Don't Forget IRS Form 941

    Your obligations as an employer include various employment taxes. Use this form to report them.
  9. Entrepreneurship

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  10. Taxes

    What's IRS Form 2848 Used For?

    It's a power of attorney tax form and here's what it can, and cannot, do.
  1. Duty Free

    Goods that international travelers can purchase without paying ...
  2. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  3. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  4. Quid Pro Quo Contribution

    A charitable donation for which the donor receives something ...
  5. Readvanceable Mortgage

    A mortgage feature that allows the borrower to re-borrow the ...
  6. Buffett Rule

    A tax rule proposed in 2011, by President Barack Obama, stating ...
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  3. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  4. Are Social Security benefits taxable after age 62?

    Eligibility to collect Social Security benefits begins at age 62. Many seniors, to collect larger benefit amounts, wait until ... Read Full Answer >>
  5. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
  6. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!