Preparation Can Make Year-end Less “Taxing”
Few of us relish the idea of paying taxes, but it’s our responsibility to contribute to the nation’s coffers according to the Internal Revenue Code. While paying income taxes is an essential of American life, you’re under no obligation to pay more than your fair share. Whether you prepare your taxes on your own or hire a tax professional, make sure you’re doing all that you can to lower your 2007 tax bill.
Max out your retirement savings
It makes sense for both your current taxes and future finances to contribute the maximum allowable amount to an employer-sponsored 401(k) if available. In 2007, the contribution amount is $15,500 for taxpayers under 50 years of age and $20,500 for individuals 50 or older. If your employer matches, a maximum contribution ensures you receive the full contribution from your employer. You can also contribute another $4,000 to an IRA (add $1,000 if you’re 50 or older) if you have one. However, if your IRA is a Roth, your contributions are made after taxes and therefore are not deductible.
Use a Health Savings Account
Another tax-advantaged account is a Health Savings Account (HSA), which can be established in connection with a qualifying high-deductible health plan. You can use your HSA savings to pay for your qualified medical expenses, otherwise not reimbursed by insurance; and the interest generated on these savings can accrue tax-free.
Be charitable
Giving to a charity may be tax deductible. Donations of new or used items in good condition, stock gifts made throughout the year may be deductible. You need a receipt from the organization to prove your gift, and if you have made non-cash charitable contributions in excess of $500, you must complete a form 8283. The larger the gift, the greater the substantiation requirements.
Add up your deductions
You have two options for taking deductions on your personal taxes. One method is to itemize all of your deductions for qualifying expenditures on Form 1040, Schedule A. The other method is to take the standard deduction. Itemizing only makes sense when you anticipate your itemized deductions will exceed the standard deduction, and there are qualifiers. For example, your medical and dental care expenses (including insurance premiums) must add up to more than 7.5 percent of your adjusted gross income for you to take a deduction through itemization for the excess. A year that included extended hospitalization or other unexpected medical costs is more likely to put you into that category. Other big deductions you may be able to take include mortgage interest and property taxes. You may also be able to deduct certain employee expenses that aren’t reimbursed, job-hunting and job-training expenses, and home office costs. These types of job-related expenses are deductible to the extent they do not exceed two percent of your adjusted gross income. Remember that you are required to have receipts or other proof for all claimed deductions.
Look for tax credits
A tax credit differs from a deduction in that it is subtracted from the actual tax you are calculated to owe, whereas a deduction reduces the total “earned” dollar amount on which your taxes are based. You may be eligible for tax credits for child and dependent care, costs associated with adopting a child and certain education expenses under the umbrella of Hope and Lifetime Learning Credits. Ask a tax professional for advice before claiming tax credits.
Go it alone at your own risk
Doing your own taxes may be the most affordable route in the short run, but investing in tax advice and preparation services is money well spent. Seek a tax professional who keeps up with changing tax laws for help minimizing your tax liability and the extra confidence that your return abides by the Internal Revenue Code. If you do choose to file on your own, consider electronic filing, which can help you save time and lower your risk of errors.
Be proactive to trim next year’s tax bill
The best time to prepare for tax season is in the final month of the year preceding the tax year, which means you have the opportunity now to start planning ahead to reduce your 2008 tax bill. Consult a financial advisor to review your overall financial picture and to help you take steps to save for your financial future in a tax-efficient manner. Reach out to the resources available to you and plan ahead to lower your tax obligation and keep more of your hard-earned money.
As Ameriprise financial advisors, our dream is to help make your dreams realities. To set up a conversation, call Danielle Thomas at 302-439-2163 or Stephen A. Rifici at 302-439-2150.
This column is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. Neither Ameriprise Financial nor its advisors or representatives provide tax or legal advice. The views expressed may not be suitable for every situation. Consult with qualified tax and legal advisors concerning your own situation.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
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File # 70477 (12/07)
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