Tax planning is tricky. Should you defer income and accelerate deductions, or just the opposite? A lot depends on your individual circumstances and future tax laws. There are some common mistakes people make when trying to minimize their taxes. Here are a couple things to watch out for as you plan ahead:
Alternative Minimum Tax (AMT): The AMT is a separate income tax system with its own set of rules. In the world of the AMT, many valuable deductions are not allowed, including the deduction for state and local income taxes, property taxes, car license fees, certain home-equity loan interest paid, a portion of your medical expenses, and most miscellaneous itemized deductions. The AMT is based on your relationship of income to deductions. Increasing deductions doesn’t always result in a lower tax bill when you are subject to AMT.
Charitable deductions: The maximum charitable deduction is based on your adjusted gross income (AGI) and the type of gift you are making. You can deduct cash contributions up to 50% of your AGI. A 30% limit applies to gifts of capital gain property that has been held long-term. Gifts to veteran’s organizations, fraternal societies, and certain private family foundations of capital gain property are subject to a 20% limit. Excess contributions can be carried forward on your tax return, but they must be used within five tax years.
Roth IRA contributions: Individuals whose modified adjusted gross income is over $110,000 – $125,000 ($173,000 – $183,000 for married couples filing a joint tax return) may not contribute to a Roth IRA in 2012. Contributing to a Roth IRA will subject these taxpayers to a six percent penalty on the amount contributed. Instead, make a non-deductible contribution to an IRA and then convert it to a Roth to avoid this penalty.