By getting a jump-start on your tax planning, you can employ a number of strategies that will trim your tribute to Uncle Sam. Perhaps you can position your investment portfolio to reap capital-gains breaks. Or you can arrange for home improvements that are medically necessary — and tax-deductible.
Your first tax chore is to check the bottom line of your 2010 return to see if you should change your tax withholding or revise your estimated tax payments. The average refund for 2010 rose to a record $2,900. If you got a big refund, don’t consider it a bonus.
Instead consider cutting back on what you’re paying the government for the rest of 2011. If you owed a bunch of money, maybe you should up your withholding.
If you’re not employed or if you work for yourself, adjust your estimated payments accordingly. Employees should file a new W-4 form to change the number of allowances. Our tax-withholding calculator can give you a good idea of how many allowances to claim based on your marital status, income and size of your refund. Or you can look at IRS Publication 919, How Do I Adjust My Tax Withholding?, at www.irs.gov.
But don’t assume that you’ll owe the same tax in 2011 that you did in 2010. For example, if you had to boost payments in 2010 to cover the bill on a big capital gain, you can pay in less for 2011.
Also, taxpayers who converted a traditional IRA to a Roth in 2010 may have decided to split the income-tax bill over 2011 and 2012.
“People who fall into this category should consider making bigger estimated tax payments during this year, or if they are still working, they should have more withheld from their paycheck,” says Bob Scharin, senior executive editor at Thomson Reuters, a provider of tax and business information.
Newly retired? Now that an employer is no longer withholding taxes from a paycheck, you must do your own calculations. Rather than make quarterly estimated payments, you should ask your IRA custodian and the Social Security Administration to withhold taxes for you.