Midyear Tax Checkup Makes Extra Sense This Year

CHICAGO (AP) — Ready or not, big changes lie ahead for virtually every U.S. taxpayer next year.

Tax cuts put into place under the Bush administration that slashed rates on wages, dividends and capital gains are set to expire at the end of 2012. The Social Security payroll tax cut enacted this year also will end, as will the exemption of millions of middle-class families from the alternative minimum tax.

It behooves you to spend a little time examining your own situation ahead of time. A midyear tax review always makes sense, but more so than ever this year.

Even some basic housekeeping and preparations for the tax overhaul in Washington can save money and help you avoid end-of-the-year angst over the inevitable 11th-hour congressional tussle about what to do next.

See also: Post-Election Estate Tax Fix?

Financial checkup

A simple do-it-yourself checkup can be performed in less than an hour. All you really need is your June 30th pay stub — the one that goes through the end of this week — and your 2011 tax return.

Start by multiplying your year-to-date earnings by two to get an estimate of 2012 income and compare it to last year’s final figure. The goal is to have a better idea of how your tax situation will look next year at tax time, says Mark Steber, chief tax officer for Jackson Hewitt Tax Services.

Do the same with your withholding. The IRS recommends reviewing your withholding during the year to make sure it’s in line with what your tax liability is likely to be. There’s a withholding calculator on its website, www.irs.gov. You may wish to tweak the amount you withhold if it looks like you might either owe money or appear headed for an unwisely large refund.

Now review what might have changed this year. Do you have a new family member? Did one move out? Did you change jobs or move? Get married or divorced? Consulting with a tax professional would be the most reliable way to figure out the impact of such changes. But you should be able to get at least a sense on your own of where you stand at midyear.

While you’re at it, take a look at your savings and any 401(k), IRA or Roth IRA that you have. Will you be able to max out 2012 contributions? Make sure you’re at least contributing enough to get the company match in your 401(k). And keep an eye on your medical reimbursement account, if you have one, to make sure you’re taking full advantage.

“With six months remaining in the year, there are still opportunities to lower your 2012 tax liability via withholding changes, increase in charitable contributions, retirement savings and more,” says Kathy Pickering, executive director of the Tax Institute at H&R Block.

Coming Changes

So many changes are being discussed for next year that the natural tendency is to wait until they’re all final before sorting it all out. But tax experts say you could leave tax savings on the table if you don’t do some planning ahead of time.

Without trying to forecast outcomes, one good step to take now is to identify and start following a reliable resource or two for tax information — IRS.gov, a blog, a columnist, a favorite financial site. Then as the changes take shape, you can act quickly.

Here are some of the biggest changes brewing and some planning considerations to take into account:

— Payroll tax

A temporary payroll tax cut that has been of benefit to nearly every wage earner in 2011 and 2012 is set to expire, costing the average family an additional $1,000 a year.

“People should think about how they’re going to budget with a smaller paycheck next year,” says Elda Di Re, partner in Ernst & Young’s personal finance services group.

See also: Year-End Tax Planning: Are Variable Annuity Losses Deductible?

— Capital gains

Without congressional action, the capital gains tax will rise from to 20% from 15%.