Inside Money: Early bird tax prep

You shouldn’t wait until the end of December to make moves that will help you at tax time. Start early and you’ll have more room to maneuver. Here’s what you should look for:


Retirement savings

Lower your tax bill by contributing more to your workplace retirement plan, such as 401(k) or 403(b). Every dollar you save lowers your taxable income for the year. In 2011, you can save $16,500, and if you’re older than 50, you can sock away an additional catch-up contribution of $5,500 for a total of $22,000.

For example, if you earn $60,000 a year and you save the maximum $16,500 contribution, you’ll only be taxed on $43,500 of income. (And maybe less if you have other deductions.) Depending on your income level, maxing out your plan could put you in a lower tax bracket.

You also can deduct traditional IRA contributions — a maximum of $5,000, with an additional $1,000 catch-up contribution if you’re older than 50 — depending upon your income level.

Those who file “married filing jointly” can take a full deduction if adjusted gross income is less than $90,000. They can take a phased-out deduction if they earn between $90,000 and $110,000. Singles can take a full deduction if they earn less than $56,000, and the deduction is phased out for those who earn between $56,000 and $66,000.

And yes, you can wait until the tax filing deadline to make your IRA contribution, but why wait? Get your money working for you as soon as possible.

Your taxable portfolio

While the stock market has made huge gains since the start of the recession, your portfolio is probably filled with a mix of stocks and mutual funds on both the winning and losing sides.

If you unload losers in 2011, you can offset any capital gains you’ve harvested from winning investments. If you have only losing investments in your portfolio, you can deduct up to $3,000 for the tax year. If you have even larger losses and you sell now, you can carry over those losses as deductions for future tax years.

While you’re at it, this is a great time to reevaluate your portfolio and make sure your asset allocation is in balance.

Your paycheck

It stinks to be surprised when your tax preparer tells you you’re going to owe a bunch of money to the IRS. So don’t be surprised. If you’re a salaried employee, consult with your tax preparer about the money you’ve earned so far, what you expect to earn before the year is out and how much you’ve already paid in taxes.

If the numbers are off, you have three months to adjust your withholding so you pay a little extra each week, avoiding a big bill when you file your return. Send your tax preparer your most recent pay stub, along with details about how your deductions have changed since last year, and ask for an analysis.

If you’re self-employed, you, too, can take action. Compare your income and deductions so far this year with those from last year. If you’re on track to earn more in 2011, ask your clients to pay you after Jan. 1. (Same goes for salaried employees who expect a year-end bonus.)

Another option is to increase your estimated tax payments so they’re in line with your expected income. Just remember that many believe tax rates will go up in the years to come, so you may pay less taxes if you pay at today’s tax rates. Talk to your tax preparer before making any moves.

Other savings ideas
— Consider giving more to charity to increase your deductions.

— Bunch your medical expenses, which must exceed 7.5 percent of your adjusted gross income, to be deductible on your federal return. For a New Jersey deduction, costs must exceed 2 percent of your gross income.

— Fees paid to financial planners, estate planning attorneys or tax preparers are deductible on Schedule A on your federal return if they exceed 2 percent of your adjusted gross income. Consider prepaying these pros so you can bunch the deductions.

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