Reduce tax bill next spring with simple tuneup now

WASHINGTON (11/28/07)--As 2007 draws to a close, it's time for a tuneup--a money tuneup, that is. Implementing simple tax planning strategies now could save you big bucks come tax time next year (Kiplinger.com Nov. 1).

A year-end tuneup is good advice for anyone, but it's particularly important if you've experienced a change in circumstances during the past year: marriage, divorce, death of a family member, job change, purchase or sale of a home or business, or other major event.

When it comes to reporting income and deductions, it's all about timing and techniques to reduce your overall tax bill. Not all techniques will be relevant to your situation, so seek the advice of a tax professional. And remember that some strategies won't reduce your taxes if you're subject to the alternative minimum tax (AMT).

• Prepay some 2008 bills now. You'll be able to write off the deduction earlier. Common examples include paying state income taxes or property taxes early, and paying your January 2008 mortgage bill before Dec. 31.
• Pad your retirement account. Employees can sock away up to $15,500 of pre-tax salary in a 401(k)--it grows tax-deferred until you withdraw it in retirement. Workers age 50 or older before the end of the year can contribute an additional $5,000 a year. And you can contribute $4,000 this year to an individual retirement account (IRA) or $5,000 if you're age 50 or older.
• Sell off loser investments. If you have significant capital gains in 2007, sell some losers and use that amount to offset capital gains (PR Newswire Nov. 7). If your losses are larger than your gains, deduct--up to $3,000 in any one year--the capital loss against other income, such as salary. Then carry over additional losses into subsequent years when you can use them to offset future capital gains.
• Energize it. There's still time before Dec. 31 this year to install energy-efficient storm windows and doors for a tax credit of 10% of the costs ($500 maximum credit), or a high-efficiency air conditioning system or water heater for a $300 tax credit ($500 lifetime cap). And there's a tax credit of 30% of the cost to install solar panels, solar water-heating equipment, or a fuel-cell power system in your home ($2,000 maximum credit).
• Buy classroom supplies. Teachers and teacher's aides can deduct up to $250 of the cost of certain items used in the classroom--books, supplies, software and other computer equipment. Hurry--this deduction expires at the end of the year unless Congress extends it.
• Spend down your health-care flex account. Not every company grants an extension to March 15, 2008, to spend 2007 flex dollars. The use-it-or-lose-it provision means unspent dollars go to waste, so schedule eye exams, prepay orthodontia bills and stock up on prescription and certain over-the-counter drugs. Check with your human resources department for a list of accepted charges.
• Keep receipts for charitable donations. All monetary contributions--regardless of the amount--now require documentation such as a canceled check or a receipt from the charity. New Internal Revenue Service rules went into effect in October 2006.

Finally, if you anticipate a large refund, consider cutting back on withholding, which will put more money in your paycheck now. Use Kiplinger's withholding calculator at Kiplinger.com/tools/withholding/ to run some numbers.

For more information, read "Credits and Deductions Save You Tax Dollars" and "Preparation Softens Blow of Alternative Minimum Tax" in Home & Family Finance Resource Center.

courtesy of cuna.org