For many Americans, year-end tax planning can be a tricky affair where they have to accomplish certain objectives in order to maximize their tax savings for the year. A tax-saving move done in the current year should never be done at the expense of a greater tax bill the following year. However, 2012 may stand as one of the hardest years ever in this regard, as Congress grapples with the fiscal cliff that America stands to hurtle over if it cannot reach an agreement to prevent it. However, there are still several things that you can do to at least partially prepare yourself for 2013, regardless of how things turn out.

Wait to Itemize
If taxes go up in 2013, then next year might be a better year to itemize than this year. If you are just on the edge of being able to itemize deductions, then it might be wise to wait to incur expenses that you can report until next year. For the moment, you should bunch up your year-end charitable donations and medical expenses and also have money set aside to pay your January mortgage costs and property taxes. That way you will be able to immediately pay those bills and make those donations this year if the new tax laws show that you will be better off doing so for 2012. Then you can wait and do it all in January if the laws show that you will save more by doing so next year, which will likely be the case for many filers.

Dump Those Winners
The Bush tax cuts are set to expire at midnight on Dec. 31, 2012. If you have stocks or other securities that have appreciated materially for more than a year, then this year will be the time to sell them if you are not planning on holding them for the long term. Many experts believe that the long-term capital gains tax rates are going to go up by at least 8% next year, regardless of any compromise that Congress may reach at the last minute. If this happens, then you can save money by selling any taxable holdings you have in your portfolio in the final trading days of the year. Of course, this doesn't mean that you should necessarily liquidate all of your long-term holdings for the sole purpose of paying a lower tax rate on the sale; this can deprive you of future gains that you may need for retirement or other expenses.

Contribute and Convert
Although Congress may reduce or eliminate some or all of the tax breaks that we get in our retirement plans, our previous contributions may be grandfathered in, depending upon how things turn out. You may therefore be wise to pack away additional contributions into your IRAs and employer-sponsored retirement plans before the end of the year, while the current contribution limits and deductions are still in effect. You may also want to consider converting any traditional IRAs or qualified plans into Roth accounts if you were planning to do so in the future if the new laws dictate that your tax rate will increase in 2013. This move has little risk for you, because if it turns out that you would have been better off without converting your assets, then the IRS will allow you to undo the conversion until Oct. 15, 2013.

Adjust Your Withholding
An astounding majority of Americans (over 75%) receive a refund when they file their income taxes each year. The average refund equals about $3,000, which is the equivalent of loaning the government $250 out of your pocket each month. Because withholding and other taxes may increase next year, you can help to preserve your budget by raising the number of allowances that you list on your W-4 form. This can help to offset the $3,500 tax increase that the Tax Academy study indicates the average family will face next year if America goes over the Fiscal Cliff.

The Bottom Line
These are just some of the strategies that may help you to save on taxes and prepare for the new tax laws and rates. For more information on how to prepare for the Fiscal Cliff and how you can prepare for it, visit the IRS website or consult your tax or financial advisor.

Related Articles
  1. Investing News

    Mexican Energy, Telecom Reforms Please Foreign Investors

    Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
  2. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  3. Taxes

    What IRS Form 990 Tells About a Nonprofit

    Want a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
  4. Taxes

    Top Reasons to File Separately When Married

    Most of the time, it makes sense for couples to file their taxes jointly. Except for these possible exceptions...
  5. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  6. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  7. Taxes

    What IRS Form 8949 Is For

    Selling a painting or that lake property? Disposing of your fossil fuel stocks? You need to know about this IRS form.
  8. 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.
  9. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  10. 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.
RELATED TERMS
  1. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
  2. Slander

    Slander is the act of harming one person’s reputation by telling ...
  3. Libel

    Libel is publishing a statement about someone in written form ...
  4. Defamation

    Defamation is any statement (written or spoken) that damages ...
  5. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  6. PCI Compliance

    Technical and operational standards that businesses are required ...
RELATED FAQS
  1. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  2. What are some tactics businesses can use to increase unlevered free cash flow?

    Unlevered free cash flow is defined as earnings before interest taxes, depreciation and amortization (EBITDA) less capital ... Read Full Answer >>
  3. How does transfer pricing affect managerial accounting?

    In managerial accounting, the transfer price represents a price at which one subsidiary, or upstream division, of the company ... Read Full Answer >>
  4. What is the difference between federal and state withholding tax?

    You can file your federal taxes by yourself by downloading and printing the forms off the Internal Revenue Service, or IRS, ... Read Full Answer >>
  5. What is an adjusted cost basis and how is it calculated?

    The cost basis of an investment or asset is an important consideration in tax planning for individual investors, business ... Read Full Answer >>
  6. What are some ways to minimize tax liability?

    Minimizing tax liability is one of the most important financial planning aspects for business owners and individuals each ... 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!