Seven year-end financial moves that could lower your tax bill
These strategies may save you a bundle when Uncle Sam comes knocking April 15.
The holiday season has arrived, so deck the halls, hang the mistletoe, and make sure to act on a few lessons from last year's tax return.Skip to next paragraph
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Even though taxes for 2007 aren't due until April 15, 2008, tax experts say now's the time – before Jan. 1 – to make the financial moves that can lead to big savings on tax day.
"After the end of the year and before April 15, just about the only thing you can do to help out your tax situation is to fund your deductible IRA [individual retirement account] or something like that," says Mark Luscombe, principal analyst for CCH, a publisher of tax-related information in Chicago. "But there's loads of stuff you can do before year-end."
As the countdown to 2008 begins, opportunities still beckon for those who can fit a little tax planning into their hectic year-end schedules. Here are seven moves that tax experts recommend doing before midnight on New Year's Eve:
1. Maximize retirement contributions
Workers with a 401(k) or 403(b) retirement savings plan benefit on multiple levels by steering cash now into those coffers, according to Barbara Steinmetz, a financial planner with tax expertise in San Mateo, Calif. Whatever goes into those vehicles, she explains, comes off one's adjusted gross income (AGI). Hence, those who take this step have lower taxable incomes than they would otherwise.
Plus, workers whose employers provide a matching contribution are, by funding their accounts, making sure they don't leave free money on the table. And maximizing one's retirement contributions increases the likelihood of having enough money on hand down the line for a comfortable retirement.
"If you can lower AGI, you could be affecting other numbers," such as medical deductions, which are calculated as a percentage of AGI, Ms. Steinmetz says.
2. Get a jump on deductions
Deductions don't just happen. Ideally, they result from well-planned expenditures during a particular tax year, says William Stromsem, director of the tax division for the American Institute of Certified Public Accountants, a New York-based professional association. He notes that a few well-targeted expenses this month can soon bode well during tax season.
For instance, a small-business owner may be planning to buy a new computer system or a new truck. By making such a purchase before Jan. 1, this taxpayer can almost immediately begin reducing how much he or she owes in taxes by taking the capital expense as a deduction on a 2007 tax return.
Situations vary, but CCH's Mr. Luscombe notes this rule of thumb: If something is listed as an eligible deduction or credit on a schedule 1040 form from the Internal Revenue Service (IRS), and it's already on an individual's to-do list, then it's worth considering as a December action item.
3. Give now, save later
Taxpayers with a soft spot for a relative, friend, or charity would do well to get their checkbooks out soon.
That's because they can give as much as $12,000 to any individual before Dec. 31 and do so without triggering a penalty. Likewise, donations made to charity before that date are deductible on a 2007 tax return. Donors should always request receipts, even for small amounts, and save them in the event of an IRS audit.
This year, persons over the age of 70-1/2 have particular reason to consider being charitable in December. A soon-to-expire provision in the tax code allows people in this age range, who are by law making withdrawals from their IRAs, to reduce their AGI by forgoing some of that IRA income and requesting that it instead go directly to charity. For those who intend to be charitable anyway, Luscombe says, doing so with IRA funds often makes good sense. This provision expires Dec. 31.