10 tax time bombs to defuse now -- Page 2
By Kay Bell • Bankrate.com

5. Make early miscellaneous payments
Miscellaneous deductions -- union or professional dues, job-related educational expenses and subscriptions to business publications -- also can help cut your taxes.

They, too, must meet a percentage of your adjusted income to count. In this case, it's 2 percent.

If you're near the threshold this December, prepay some of these expenses. Buy the uniform you were going to get in January, extend your business journal subscription another year, pay the registration fee for that job-related computer class you plan to take in February. Bunching these miscellaneous expenses and paying early could save you some tax bucks.

Here again, remember the AMT. Miscellaneous deductions aren't allowed if you have to figure your taxes under the alternative method.

6. Teachers, go shopping!
Up to $250 you spend on materials to make the learning experience better for your pupils is tax deductible. This tax break had expired, but Congress renewed it for the 2004 and 2005 tax years as part of legislation passed in October and signed by the president.

Teachers aren't the only ones eligible for this bit of a tax break. The educator expenses deduction also can be claimed by teacher aides, counselors, even principals, as long as they work at least 900 hours in a public or private school for kids in grades kindergarten through 12.

Even better, you don't have to itemize to take this break. It's available directly at the bottom of the long Form 1040, and the amount you claim helps reduce your income amount. Less income usually means a lower tax bill.

All you've got to do is buy $250 worth of classroom supplies by Dec. 31.

7. Flex your spending account muscle
Do you have a flexible spending account at your job? Does it still have money in it? Does your benefit year operate on a calendar basis? If you answered "yes" to all these questions, then you're running out of time to maximize this valuable fringe benefit.

Flexible spending accounts allow workers to put away pretax cash to help pay out-of-pocket child or dependent care expenses or uncovered health costs. Not only can these accounts help you meet extra costs, the account contributions are taken out of your paycheck before taxes are calculated.

These accounts are particularly beneficial when your medical expenses don't add up to the percentage-of-income threshold discussed in Tip 4. Plus, the IRS has decided that you now can use the account money to pay for over-the-counter medications.

But there's a downside. If you don't use your account money in the benefit year that it's contributed, it can't be carried over to the next year.

While your eventual tax bill won't be affected if you don't spend all your flexible account money, you'll be wasting this tax-advantaged option if you don't spend it in the next few weeks. So don't lose it, use it!

8. Tend your company retirement plan
Give yourself a holiday gift of future financial security by starting or adding to retirement savings accounts. In many cases, you get an immediate tax break and begin building a nest egg sooner.

If you're eligible to participate in your company's 401(k) retirement plan and its rules allow you to enroll now, do it. If you're already contributing, think about upping the amount. The money you contribute reduces your taxable income.

Since it's so late in the tax year, your increased retirement account contributions probably won't help you cut your coming tax bill. But you'll definitely have a head start on reducing next year's taxes.

This strategy also applies if you work for yourself, either full-time or as a side business to supplement your salaried job. Dec. 31 is the last day you can open a Keogh or solo 401(k) retirement plan. These savings vehicles are the self-employed equivalents of corporate retirement programs and will help whittle down the taxable amount you brought in via your own enterprise.

9. Tally your sales taxes
Thanks to some pre-election legislative maneuvering, many taxpayers will enjoy a new tax break on 2004 returns. Taxpayers who itemize will be able to choose whether to deduct state and local income taxes or sales taxes.

The sales tax break obviously will help residents of states without income taxes, but every taxpayer should give this deduction a close look. In some cases, state income tax rates may be low enough to make the sales tax deduction more valuable.

The IRS has posted on its Web site the sales tax tables that filers can use to claim this deduction, so there's no need to tear apart your house looking for receipts from the beginning of the year. (If you prefer to have the information in paper form, a printed version will be available for mailing in a few weeks by calling 1-800-829-3676.) But if you do indeed have enough receipts to show that you paid more in sales taxes than your applicable table allows, you can claim that larger number.

An added bonus: If you bought a vehicle or boat this year, you can add that sales tax amount to the table number to arrive at a bigger deduction on your 2004 return.

The concept of bunching could pay off with the sales tax deduction, too, especially for taxpayers who find that their income tax and sale tax amounts are relatively close. If this is your case, you might want to alternate the two deductions from year to year.

Suppose, for instance, you're planning to add a deck and turn your basement into a spare bedroom next year. You also bought a car, and paid a hefty sales tax on it, in June. In this case, it might be worthwhile to buy the lumber, flooring, wallpaper and other home improvement supplies now and add that sales-tax tally to the auto levy to push it past your 2004 state income tax payments. Then next year, you would claim the income tax deduction instead of the sales tax break.

10. Check your withholding
Finally, stop giving Uncle Sam free use of a part of your hard-earned money. Most of us pay the bulk of our annual tax bill through payroll withholding, and it's important that the amount be as accurate as possible.

If you don't have enough taxes taken out of your paycheck, you could end up owing the IRS at tax-filing time. Worse, you could face penalties and interest if the shortfall is more than $1,000.

Going too far the other way with your withholding is not a good idea, either. Sure, over-withholding means you'll get a refund check when you do file. But that also means that the federal government, instead of you, has had access to your cash all these months. If you had been collecting the cash, you could have stashed it in a savings account or CD (Bankrate can help you find the highest rates), where it would have earned a little bit of interest and provided you with some extra money to spend on holiday gifts.

Making adjustments to your withholding is easy. If you find that too much tax is being taken out, put cash back in your pocket by increasing exemptions on your W-4 to reduce withholding. If you're not having enough withheld, you can prevent a huge tax bill on April 15 by reducing exemptions or even telling your boss a specific extra dollar amount you want withheld.

Your payroll manager office should have a new W-4 you can fill out, or you can download one from the IRS site. The key is to get the changes made before your last paycheck of the year is issued.

But even if you're too late to do anything about 2004's withholding, it's still a good time to look at what adjustments you should make for the coming year. This is especially important if circumstances in your life have changed -- you got married, had a child or bought a house. All of these affect your taxes and can be accounted for through payroll withholding.

And when the changes show up on your paycheck, you've got a head start on making sure that 2005 is a better tax year.