Check out our quick guide to preparing for year-end, and put your tax worries to bed early.
With the holidays drawing near, you may be thinking about family dinners, seeing old friends, and finding the perfect gifts for those you love. But you should also be thinking about taxes. While it may seem too soon to be thinking about April 15, not waiting until the last minute can prove an effective strategy for getting the most out of your taxes this year.
So when making your holiday plans, squeeze in time to give your taxes a once-over. See how they measure up to our checklist below, and your pocketbook may thank you later.
Compare standard versus itemized deductions. Put the amount of your 2007 standard deduction next to your itemized deductions and see how the two compare. If your itemized deductions exceed the amount of your standard deduction, you’ll save tax dollars by itemizing. If your itemized deductions are close to your standard deduction, then consider shifting some of them from one year to the next. For example, if you can’t itemize in 2007 but can in 2008, consider making your annual charitable donation in January instead of December.
Make flexible spending work for you. If you don’t rack up enough medical expenses in 2007 to meet the amount you set aside in your flexible spending account, you’ll lose the money. If you’ve got extra, it’s a good idea to start making a few last-minute appointments, and be sure to save your receipts for medications.
Keep track of medical costs. Keep track of your unreimbursed medical expenses all year long. You can deduct them only if they exceed 7.5% of your adjusted gross income. If you think you’re close to the 7.5% requirement but not quite there, you might consider having an elective or necessary procedure before year-end. (Be sure to check that it’s among the qualifying deductible expenses.)
Get serious about retirement. One way to lower your taxable income for the year is to contribute to or open a retirement plan, such as a 401(k), 403(b), deductible IRA, SIMPLE IRA, or SEP. For 401(k)s and 403(b)s, you have until December 31 to make contributions for 2007. For IRAs and some other plans, you have until April 15 to make contributions. Check with a tax professional to determine which move is best for you.
Adopt a charitable attitude. Donating clothing and household goods to charities before January 1, 2008, is not just a good deed; it’s also deductible on your 2007 return. Be sure to get a receipt from the organization that you’re donating to, and keep in mind that the deduction is limited to the item’s current fair market value (what you could sell it for at a garage sale). So do a good deed, and let it work for you.
Save with the sales tax deduction. If you itemize deductions on your return, you can choose to either deduct your state and local income taxes or your state and local sales taxes for 2007. For those living in states that don’t impose an income tax, the choice is clear. For everyone else, number-crunching will point the way to the most advantageous option.
Sell off stock. If you have a large net capital gain so far this year, you might want to consider selling some stock to generate a loss before year’s end. Doing so could reduce the amount of tax you pay this year. However, remember that if you do sell stock to generate a loss, you’re prohibited from purchasing substantially similar stock for 30 days before or after the sale that generated the loss.
Give the gift of cash. If you’re planning on giving large cash gifts this holiday season, it’s best to know the rules. If you’re married, you can gift up to $24,000 to one individual free of gift tax. If you’re single but the person to whom you’re giving the cash gift is married, you can gift each person up to $12,000 tax free.
Don’t let extra money sit around. If you have a large amount of cash to invest and want to shift some of your income to 2008, consider investing in a short-term CD or a Treasury bill that matures in 2008.
Strategies for the self-employed. If you’re self-employed and use the cash method of accounting, you can decrease your 2007 taxable income by delaying your December billings until January, setting up a qualified self-employed retirement plan (SEP), deducting charitable donations that you make on your 2007 return, and buying supplies and equipment this year instead of next.