Don't fall into the trap of only thinking about your taxes at the tax deadline in April. Keep your taxes on your radar screen year-round so you can plan for how your taxes affect the rest of your financial life, including mortgage payments, money markets, take-home pay, and investments.

Alternative Minimum Tax

The alternative minimum tax, or AMT, was created by Congress in 1969 to make sure wealthy people were paying at least a minimum amount of tax based on their income. Before the AMT law, it was easier to use complicated strategies and deductions to reduce the tax bill well below normal, often permitting highly paid people to pay little or no taxes. Unfortunately, the AMT law wasn't properly indexed for inflation and now many unsuspecting middle-class taxpayers, who by today's standards are far from lavishly paid, are paying it. Check page two of your 1040 tax form to see if you are paying AMT.

If you pay AMT, use an AMT tax-free money market account instead of a standard money market or tax-free money market fund. Also, realize that you're not getting as much benefit out of deductions for mortgage interest, real estate taxes, and personal exemptions for you and your dependents. You might also be paying more on capital gains than you realize. Check Appendix B for more resources to help you plan for being affected by AMT.

Planning Withholding Versus a Big Refund

Getting a big tax refund from the IRS is a waste of money; the government has your money sitting in its account rather than yours, and it doesn't pay you interest on it while it has it! If your refund is over $1,000, go to www.irs.gov and recalculate your paycheck withholding. Check the website for help confirming that you're in what's called “safe harbor” so you won't owe a penalty for underwithholding, and then make the paycheck adjustments the worksheet suggests. If you'll feel bad about missing the fun of getting a big check in April, set up your own “tax refund” in a money market account. Make a direct deposit with the amount your paycheck grew by when you adjusted your withholding. Instead of going to the government as withholding, your money will go to your account and earn interest. Using direct deposit makes your paycheck look the same as it did when you adjusted your withholding in your favor, and you'll have a nice nest egg built up in your interest-bearing money market account come April.

Midyear Checks

Don't be surprised by extra taxes due on tax day or a big refund caused by a midyear cash windfall. Bonus checks are often treated by tax rules like regular paychecks — resulting in overwithholding that gets paid back to you as a refund after you file your return. Other checks, such as IRA distributions or self-employment compensation, often won't have taxes withheld at all, possibly surprising you with a big tax payment when you file. Fortunately, the IRS website (www.irs.gov) is very user friendly. Get in the habit of using the site to calculate your withholding at midyear, especially if you have additional midyear income you didn't plan for.

Itemized Versus Standard Deduction

Not everyone has enough deductions, such as mortgage interest, real estate taxes, and medical expenses, to make itemizing these deductions worthwhile. Check the IRS website to see whether your deductions will total more than the standard deduction. Don't spend time keeping records for things such as charitable deductions if you're not going to take them on your return.

Planning for Phase-Outs

The amount you can claim in total itemized deductions is limited by your income. As your income increases over a certain amount, the total dollar amount of itemized deductions you can claim is reduced. This is called phasing out your deductions. Check the bottom of last year's Schedule A to see if this problem affects you. Understanding whether you are getting the full benefit of deductions such as mortgage interest will help you budget for these expenses.