Adjust your withholding
When it comes to payroll withholding, you want to be Goldilocks and get it "just right."
If you overwithhold federal taxes, you'll get a big refund. That's nice once a year, but you've sacrificed control of your dollars for the other 364 days.
If you underwithhold, you'll end up owing the IRS at filing time. Owing a little isn't too bad, but a big tax bill could cause you to face penalties for not paying enough throughout the year.
It's easy to change your withholding. Just give your payroll office a new W-4. And to make sure that form will get your withholding as close as possible to your eventual tax liability, you can use Bankrate's payroll deductions calculator or the IRS' interactive allowances calculator.
Evaluate educational accounts
College costs increase every year, but tax-advantaged savings accounts can help. The key is determining which plan best suits your needs.
Every state offers at least one 529 plan, a savings account set up for a child to help pay for future college costs. Your contributions to a 529 plan are not tax deductible, but the earnings are not taxed. When you take out funds to pay for eligible expenses, the distribution also is tax-free.
The American Recovery and Reinvestment Act of 2009 added computer equipment and services to the list of allowable 529 expenses. But that option expired at the end of 2010.
Tax-free money from another educational savings plan, the Coverdell Education Savings Account, still can be used in 2011 for computer costs. However, Coverdell accounts, which were expanded as part of the Bush tax cuts, lost some other valuable options this year.
If Congress doesn't renew the expired Coverdell provisions, such as the ability to contribute up to $2,000 a year and use the tax-free money for precollege school expenses, you might want to consider rolling Coverdell money into a 529 Plan.
Estimate your AMT exposure
Although Congress annually enacts changes to the income levels for the alternative minimum tax, or AMT, many middle-income taxpayers still find each year that they are subject to this parallel and costly tax.
This extra tax calculation, in which many commonly claimed deductions are not allowed, is required if you earn more than a certain threshold income. It was created in 1969 to ensure that wealthier taxpayers pay at least a minimum amount of tax.
The main problem with the AMT is that it's not indexed to inflation, hence the need for yearly legislative action to increase the amount of income exempt from the AMT. But just as problematic is that many deductions allowed under the ordinary tax system -- state and local income taxes, real property taxes, miscellaneous deductions and the usual amount of medical expenses -- cannot be used to offset the AMT.
If you're in a higher tax bracket and fear that you might end up paying the alternative tax, talk with your tax adviser sooner rather than later to consider ways to limit your AMT exposure.
Start a business
Whether you operate your own business as your main source of income or as a sideline venture, tax laws offer several ways to save.
The Small Business Jobs and Credit Act of 2010 increased the Section 179 tax deduction. This provision allows you to deduct qualifying expenditures in the tax year in which they are made rather than depreciate it over several tax years. For 2011, the maximum Section 179 deduction is $500,000.
Other popular business tax breaks also remain in effect. You can write off some of your new business startup costs, as well as many home office expenses if you run your operation from your residence.
If your company is a bit bigger and in the manufacturing sector, the domestic production activities deduction could help. It allows you to claim a percentage of your taxable income to help reduce your company's tax bill. The main requirement is that the manufacturing be based in the United States, but the range of qualifying activities is wide. Details can be found in the instructions for IRS Form 8903, which you'll file to claim the deduction.
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