by Richard Schneider
Emeritus Professor of Accounting
Winona State University
Yes 2012 is half over, and itís time to evaluate our income tax planning for 2012, that we had done earlier this year, or at least just after filing our 2011 tax return. It seems like there is nothing like having to pay in a bundle or getting a large refund, to motivate us to look at our withholding and/or estimated payments.
I donít like surprises, but this last year was a bit of a surprise, we had significant over withholding. Now mind you the extra-large refund was a pleasant and useful surprise, in that we needed a new lap top, and took a short vacation to Florida in February. We had increased our withholding, anticipating an additional monthly income beginning in March of 2011, but the income started in December of 2011 instead.
Planning withholding and/or estimated payments can start with what happened last year, but most importantly we need to adjust for changes this year. Will or did you add a child to your family? Are any children attending college? Have your children become independent, so you cannot claim them this year? Has a child or grandchild moved in with you and will be your dependent? Did you buy a house and now have a mortgage, or did you sell your home and are now renting? Did you take a higher paying job or were you laid off, receiving unemployment? Did you retire, and now have social security and pension benefits income? Did you get married or divorced? Did your spouse die this year? Did you inherit an IRA account from a relative? These and many other things can have a great impact on your tax status, and the amount you owe.
With mortgage rates so low many are buying homes, and will have mortgage payments. Generally having a mortgage will mean you would be able to itemize your deductions and save a little on taxes. If you sold your home and are now renting, you most likely will not be able to itemize this year, and other things being equal your tax bill
will go up.
Planning ahead can save surprises come tax time. Not only can you adjust your withholding or payments now, you have time to structure transactions, to maximize the tax benefit. Many taxpayers wait until filing time and want the preparer to do magic with what has already happened. Itís an impossible job in most cases, and I am not up to lying and cheating.
Your best bet is to make an appointment with your paid tax preparer for a planning session now this summer while there is time remaining to make adjustments. Frequently your tax professional will be able to help with just a quick phone call, but if a visit is needed the fee is well worth the peace of mind and knowing what your options are and the coming tax affects.
I do volunteer tax work only, through AARP/TAXAIDE, and we are only open during the tax season. If you used one of the national chain tax services, you may find getting good tax planning advice difficult, as almost all of the employees are seasonal and have little or no background in tax planning.
Now if we had a national transaction tax, rather than an income tax, these paid tax consultants would be able to do some other useful work. The IRS could operate more effectively, in that most of its efforts would be focused on businesses, collection and submitting of the transaction tax, and not these millions of individual tax payers. I would have to get a different volunteer job, and maybe ice fish more.