NEW YORK (AP) – Before the ink has dried on your 2007 income tax return, it wouldn't be a bad idea to take a careful look at what changes you can make this year – from adjusting your withholding to reviewing investments and adding to retirement accounts – that will benefit you at tax time in 2008.
“The earlier in the year you start planning, the more you're going to save,” said financial adviser Jonathan D. Pond, author of Grow Your Money – 101 Easy Tips to Plan, Save and Invest. “There's very little you can do in late December to make big inroads on your taxes.”
An obvious first step is making sure you have a system for keeping track of tax-related documents, said Rande Spiegelman, vice president for financial planning at the Schwab Center for Financial Research in San Francisco.
“If you found yourself spending more time gathering your records than preparing your return this year, you might want to develop a new system,” Spiegelman said. “It could be as simple as two envelopes – one for expense receipts, the other for income items.”
He added that, “even if you use a professional tax preparer, you can cut the fees if you're organized going in.”
Pond said something else to look at is whether you got a big refund. The Internal Revenue Service says refunds this year are averaging $2,637, up from $2,578 last year.
“Getting a big refund is bad news,” said Pond, who describes it as similar to giving “an interest-free loan to Uncle Sam.”
Instead, he suggested, anyone with an outsized refund should go to their employer and fill out a new Form W-4, Employee's Withholding Allowance Certificate, to lower the amount withheld from wages. The IRS has a calculator on its Web site at www.irs.gov to help workers project their correct withholding rate.
Those who want to put that extra money to good use – or others who are looking for an added tax break for 2008 – can increase contributions to their company-sponsored 401(k) retirement accounts or open Individual Retirement Accounts.
Savers get a double tax benefit using these accounts because contributions reduce their taxable income and the retirement savings grow tax-deferred.
The limit for 401(k) contributions remains at $15,500 in 2008, with an additional $5,000 allowed for workers 50 and older. The limit for IRA accounts rises to $5,000 this year from $4,000 last year, with a $1,000 catch-up.
“It's nearly impossible to put too much money into retirement plans,” Pond said. “And the reason you want to start (funding them) early in the year is that you can build up a significant amount.”
Amey Stone, senior editor with AOL Money & Finance, said many taxpayers who review their 2007 forms may find they would have qualified for credits or deductions if they had the right documents.
“So be better about saving receipts this year, especially for charitable contributions” and other items that could result in deductions, Stone said.
Stone also said that because of the economic downturn, some people may want to start freelancing or consulting or set up in-home businesses to supplement their income. These small businesses will not only boost earnings but could make the worker eligible for certain business expense deductions, she said.
“It could be a great stopgap if you're in a position of losing your job or face a big cutback in hours,” Stone said.
Spiegelman of the Schwab Center suggested taxpayers review the major attachments to their 1040 tax forms – Schedule A, Itemized Deductions, and Schedule B, Interest and
Ordinary Dividends – to see if some adjustments could reduce their tax bill.
On the deductions side, are there ways to accelerate deductions into 2008 to boost tax savings?
For example, Spiegelman said, “Look at things like property taxes to determine if they could be paid in December, rather than in the following spring.”
Families should make sure they're claiming all the deductions or credits they're allowed for education costs, he added. IRS Publication 970, Tax Benefits for Education, describes a variety of options.
On the interest and dividends side, taxpayers who got hit with a lot of taxable interest last year might want to look at less vulnerable alternatives, such as municipal bonds or bond funds.
“Each person has to look at his or her own particular situation,” Spiegelman emphasized. “If you've taken a new job, you may be making more this year. If you're retiring, you may be making less. That will affect your tax strategies.”
Spiegelman suggested taxpayers try running some alternative scenarios on their tax software, such as TurboTax, or call their tax professional and ask, “Can you do some projections for me?”
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