RENEE MONTAGNE, HOST:
Tax time is still a few months away but as we all know, you have to do a lot of things before the first of the year in order to save yourself money on April 15th.
Mary Beth Franklin has been writing about year-end tax moves for Kiplinger's Personal Finance magazine. She is a senior editor there, and she joined us here at MORNING EDITION to offer some extra guidance. And thank you for joining us.
MARY FRANKLIN: My pleasure.
MONTAGNE: Let me start by saying that we're still in the midst of tax uncertainty.
FRANKLIN: We are. It always seems to be that the year-end guessing game of what will next year's rates be. We're actually quite fortunate. We know that the current income tax rates, and capital gains rates, will remain in effect for 2011 and 2012. So that makes year-end tax planning a little easier than usual. But there are a few outlying taxes out there that will disappear at the end of the year.
MONTAGNE: What is, in your opinion, the single most valuable move someone could make this year to lower their 2011 tax bill?
FRANKLIN: The biggest thing is, if you have a 401(k) retirement plan at work, and you have not yet maxed it out, that is a great way to - kick some extra dollars into your retirement account. It's good for you in the long run and assuming it's a traditional 401(k), you'll also lower your tax bill.
MONTAGNE: Of course, a lot of people aren't able to max out. Their income won't allow it. But what would be maxing out?
FRANKLIN: For 2011, the maximum you can contribute is $16,500. And if you are age 50 or older, you can kick in an extra $5,500. That brings your grand total to $22,000 for 2011.
Now, some people do get year-end bonuses. It's something we haven't heard about for ages. But some employers will allow you to put a portion of the bonus toward your 401(k).
MONTAGNE: You also write about another interesting way to keep some of your income, and that's what you call giving yourself a pay raise.
FRANKLIN: That's right. When you file your tax return each year, the amount of tax that's withheld from your paycheck, or that you submit through estimated tax payments, ideally should match the amount that you're going to owe when you file your tax return. But the majority of Americans are just addicted to refunds. More than 75 percent of Americans give Uncle Sam an interest-free loan, and then they get this refund in the spring. But wouldn't you really rather get the money when you earn it?
There's this easy fix. Just file a revised form W-4, which you get from your employer. And that will allow you to claim extra allowances, and that will mean more money will be in your paycheck each month.
MONTAGNE: Let's move onto something else: one's investments. What about the stock market, which has been up and down and up and down, but a lot down this year? Can that help you with your taxes?
FRANKLIN: Absolutely. That's a classic year-end tax planning move called harvesting your losses. Now, this only applies to your taxable investment accounts. It doesn't apply to retirement accounts like IRAs and 401(k)s. But if you realize you have some losing investments, and you choose to sell those before the end of the year, then you can use that to offset some winners and possibly, pay no tax at all.
And the other thing with losers, if you match up your gains and your losses, if you have any excess losses, you can use up to $3,000 of those losses to offset regular income, like your salary or IRA distributions.
MONTAGNE: This would be handy for a lot of people if they had the money to do it in the first place, and that is some sort of remodeling to make one's home more energy efficient.
FRANKLIN: If you're installing windows, like we did, the tax credit is limited to $200. And keep in mind that a tax credit is more valuable than a tax deduction. A tax credit reduces the amount you owe or increases your tax refund, dollar for dollar. This is also a lifetime credit. It's been in effect for several years, and if you've taken advantage of it before and have claimed at least $500 of that energy tax credit, you can't take it this year. It's also the last year it's available. It will expire on December 31st, 2011, unless Congress acts.
MONTAGNE: Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance Magazine, with tips to save on taxes for 2011. Thanks very much.
FRANKLIN: Thank you.
MONTAGNE: And you can read more year-end tax tips at npr.org.
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