First, watch out for the AMT - Alternative Minimum Tax. This isn't a tip, it's a warning. Unless Congress moves quickly, we're going to have a serious problem with the AMT. This is a tax system that was originally created to prevent the wealthy from skipping out on paying taxes.
But it's not automatically indexed for inflation. So while today about 4 million people pay this tax, if Congress doesn't pass something soon, more than 20 million people will be hit with it this year. "It's something you want to keep your eye out on," says AuWerter. "If you are hit with the AMT, you're not going to be able to take some of the deductions that you have... in previous years."
Another thing to consider is selling unsuccessful investments. If you've got some stocks or mutual fund shares that are underwater, think about dumping them. This is a powerful tax strategy: You can use those losses to offset any realized capital gains you have this year, plus up to $3,000 in ordinary income. After that, your losses can be carried over to next year. "Lots of times we hang onto to losing investments hoping to someday they're going to break even when a better strategy is just to sell at a loss and move on to something better," says AuWerter.
Also, try prepaying deductible expenses. This can be a clever tax move. You could, for example, prepay your January mortgage bill - send it in in December, rather than January. By doing that, you will have made 13 payments this year - which means you get a bigger deduction on your mortgage interest. "This move makes the most sense if you think you'll be in the same tax bracket next year, or a lower one," says AuWerter.
You could also try to reduce your taxable income by boosting your retirement contributions. "The more you put into your retirement account, the smaller your tax bill is going to be," says AuWerter. Most folks can contribute up to $4,000 to a tax-deductible IRA. If you have a 401(k) that let's you change your contribution amount whenever you want, you still have a few weeks to get in some extra cash. The contribution limit is $15,000 this year for most employees. "You'll be happier during retirement, and you'll be happier during tax time too," says AuWerter.
Finally, time your mutual fund purchases carefully. This is a tricky time to buy into a mutual fund. It's usually in Nov. or December that mutual funds issue their annual tax bills to shareholders - if they have one at all. Now, if you buy in before that distribution is made, you'll be stuck paying that tax bill - even though you weren't around to enjoy the gains. So before you buy into a fund, call up the fund family to see if it will have a distribution this year. If it will, wait until after it's been issued to buy.
For more information on getting your finances in order, or other personal financial advice, click here to visit SmartMoney.com.
By Stephanie AuWerter