MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
SEVEN WAYS TO TAKE CONTROL OF YOUR 2007 TAX BILL
(October 1, 2007) -- When it comes to cutting your 2007 tax bill, there’s no time like the present, says the Virginia Society of CPAs. Here are some tax strategies you can put into action now to reduce your 2007 tax bill.
1. Take retirement savings to the max
One of the best ways to trim your tax bill is to make the maximum allowable contribution to your retirement savings plan. For 2007, employees may contribute up to $15,500 of their pre-tax salary to a 401(k) and the fund grows tax-deferred until withdrawn. Workers who will be at least age 50 by the end of the year may contribute up to an additional $5,000 per year. The Individual Retirement Account (IRA) contribution limit for the 2007 tax year remains at its 2006 level of $4,000 ($5,000 for taxpayers who are age 50 or older).
2. Defer income
Income you don’t receive by December 31 isn’t taxed until the following year. While employees on salary don’t have much of a choice regarding when they get paid, taxpayers who are self-employed or do freelance or consulting work have more flexibility. By delaying billing until late December, you can postpone the receipt of income into next year. Keep in mind that this strategy only makes sense if you think you will be in the same or a lower tax bracket next year.
3. Pay some bills early
By prepaying certain 2008 bills in 2007, you may be able to write off a deduction earlier. For example, when you pay your January 2008 mortgage bill on or before December 31, you may deduct an extra month of interest in 2007. If it’s not included, remember to add the extra month’s interest amount to the amount reported by your lender on your 1099 form. Paying your state income taxes or property taxes early is another way to accelerate your federal deductions for 2007 if you aren’t subject to alternative minimum tax.
4. Take a loss
If your portfolio experienced significant capital gains in 2007, consider whether it makes good financial sense to sell off some of the losers. You can use the amount of your losses to offset capital gains. And if your capital losses are larger than your capital gains, you can deduct the capital loss against other income, such as your salary — up to a limit of $3,000 in one year. Any additional losses can be carried over into subsequent years, when they can be used to offset future capital gains.
5. Go green
Consumers who purchase and install specific improvements in their principal residence, such as exterior windows and doors, insulation to walls, ceilings, high efficiency water heaters, furnaces and boilers, and central air conditioning units can receive a tax credit of up to $500. But hurry — energy-efficient tax credits apply to improvements made between January 1, 2006 and December 31, 2007.
6. Be giving
Doing good for others can do good to your tax bill. Donations made before the end of the year are a great way to cut your 2007 tax bill. Keep in mind, however, that effective for 2007, all money contributions, regardless of the amount, require substantiation by a canceled check or a receipt from a charity. Previously, receipts were required only for contributions of $250 or more.
Donate appreciated property or stock rather than cash and you may save even more by avoiding paying capital gains taxes. Just be sure you understand the rules and give yourself plenty of time because it could take several weeks to transfer the stock or property.
7. Drain your flexible spending account
Do you still have money left in your flexible spending account? While the Internal Revenue Service (IRS) now allows companies to give their employees a two-and-one-half month grace period to spend money set aside in a flex spending account, not all businesses have adopted this extension. If you have money left that needs to be spent before December 31, don’t wait until the last minute.
With year-end tax planning approaching, now is a great time to seek the help
of a CPA to review your financials. Your CPA can advise you on how tax laws
impact your tax liability. The changes you make now can make the difference
in achieving a successful 2007.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, email@example.com
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