While the tax-filing deadline isn't until April, there are precious few weeks left this year to think about how to keep your annual contribution to Uncle Sam to a minimum. Here are some last-minute tips that will help to reduce your personal 2007 tax bill.
Save More for Retirement
"One of the most important tax-savings steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plan," says Genevia Gee Fulbright, CPA, Durham, NC. "If you haven't done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2007, you may put as much as $15,500 into a 401(k), 403(b) or 457 plan. If you're over age 50, you may add an additional $5,000."
Every dollar you contribute means you will pay less income tax. Contributions to all tax-deferred retirement plans, except Roth IRAs, are tax deductible in the tax year for which you make your contribution.
"If you're in the 28 percent tax bracket, for every $100 you contribute, your federal tax bill decreases by $28," says Fulbright. "Your total savings will actually be higher when you factor in state tax savings. Obviously, the higher your tax bracket, the higher your savings."
This is "found" money. Whatever you do, don't walk away from it. If you're not in a position to contribute the legal maximum, bump up your contribution as much as possible. You'll be surprised how this can add up over time.
You must make your contributions no later than the time you file your return. You may make deposits for 2007 only in accounts that you opened prior to December 31, 2007.
Don't Forget Sales Taxes
Do you still have records of large purchases made in 2007? You now have a choice of deducting either your state and local income taxes or state and local sales taxes, but not both. If you live in a high-tax state such as Ohio or Massachusetts, you're probably better off continuing to take the deduction for state income and property taxes. However, for residents of states like Florida and Texas, which have no separate income tax, the sales tax deduction can significantly reduce federal taxable income.
Can't find your sales receipts? Not to worry: The I.R.S. has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. You'll find the tables on the I.R.S.' web site (www.irs.gov).
Have Kids in College?
If you're dishing out big bucks for college tuition, you might be able to get some back. Plan now for 2008
There are two education credits and a tuition deduction for which you may be eligible. A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by your tax bracket multiplied by $100. If you're in the 28 percent bracket, for example, your $100 deduction will reduce what you owe by $28.
The Hope Scholarship Credit is for taxpayers whose children (or they themselves) are in their freshman or sophomore year in college. It offers a maximum tax credit of up to $1,500. The Lifetime Learning Credit offers the possibility of a credit of up to 20 percent of the first $10,000 in tuition you pay, for a maximum credit of $2,000.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction. Details and earnings limitations on education deductions and credits are complex, so if you have children in college, you should check with your tax advisor to see of you are eligible.
And don't forget the $1,000 Child Tax Credit, originally scheduled to drop to $700 in 2005. It's now been extended through 2010.
Often-overlooked Deductions
"Many easily overlooked miscellaneous expenses are deductible as long as they add up to at least two percent of your adjusted gross income," says Fulbright. "Grouping them together can help you meet the two percent threshold." If applicable, you should make sure that you take full advantage of the following IRS-approved deductions.
- 1. Tax Preparation Costs: You may claim the cost of personal income tax preparation software or books as a miscellaneous deduction. If you hire a professional tax preparer to do your taxes, you may also be able to deduct the fee.
- 2. Interest From Home Refinancing: If you refinanced a mortgage and still have unamortized points left to deduct from an earlier refinancing, you can claim all the unamortized points from the earlier refinancing as deductible interest.
- 3. Purchases Financed by Loans or Credit Cards: If you made large purchases on your credit card or with a loan, you can deduct any interest costs involved.
Use caution when taking advantage of miscellaneous deductions. Document everything. If the I.R.S. decides to question you about any of your deductions, the agent will want to see all of your pertinent receipts and statements.
"Keeping your personal income tax to the legal minimum requires a little planning and effort on your part," says Fulbright, "but the time you spend chipping away at your taxes may be among the most profitable investments you'll make this year."
Check your math and be sure to get the correct tax amount from the tax table if you use it. The other numbers to be most careful about are identification numbers—usually Social Security numbers—for each person listed on the return.
The I.R.S. toll-free help line (800-829-1040) is available from 7 a.m. to 10 p.m. on weekdays and its web site (www.irs.gov) has interactive tax aids, forms and publications available to download.
If you're unable to complete your return on time, you may request an automatic extension to August 15. Form 4868 has details. There is also a special toll-free number for requesting an extension by phone—call 888-796-1074 before the regular filing deadline.
An extension gives extra time for filing only, not for paying any balance due. Interest will apply to any tax not paid by the April deadline, plus a late payment penalty if you pay less than 90 percent of the total tax on time.
When you mail your return, be sure to get it to your local post office before the last pickup of the day. Some post offices stay open late to accept returns for a deadline day postmark. You may also use one of the designated private delivery services to meet the filing deadline. Airborne Express, DHL Worldwide Express, Federal Express and United Parcel Service can provide details on which of their services qualify and how to get proof of timely filing.
What's New This Year
There isn't much new this year as far as year-end planning, just some uncertainty. The Alternative Minimum Tax (AMT) exemption was temporarily increased in 2006 to keep more taxpayers out of the AMT, and this is supposed to go back down in 2007. "I would advise taxpayers who have the ability to defer income or pre-pay expenses to keep an eye out for what is happening to the AMT so they can plan to accelerate either income or deductions to their benefit," says Carol Katz, a CPA based in Baltimore, MD.
Among the bright spots, private mortgage insurance first incurred in 2007 will be deductible as interest this year. "This could be helpful for taxpayers who purchased homes with little money down," says Katz. "This could help home office owners, at least in 2007."
This article was produced for informational purposes only and not as specific tax advice. For more information, you should contact your tax advisor.