DALLAS (BP)–It’s not too early to begin thinking about the 2007 tax filing season. A survey for the 2006 tax season found that two in five Americans procrastinate when it comes to filing their tax return. Whether you are an early or late preparer, here are tips to aid in preparing your 2007 tax return:
IDENTIFY LAST-MINUTE SAVINGS OPPORTUNITIES
— Maximize retirement plan elective deferrals. The 2007 basic deferral limit is $15,500 or $20,500 for age 50 and above. If you’ve missed maxing out your deferrals for 2007, consider an IRA.
— Contribute to a traditional IRA. Eligibility for making deductible contributions to a traditional IRA depends on two factors: 1) if you are covered by a retirement plan at work and 2) your modified adjusted gross income (AGI). The maximum contribution limit for 2007 is $4,000, or $5,000 if age 50 or above. Remember, your nonworking spouse may be eligible for an IRA and an additional deduction can be beneficial. To qualify, you must be legally married at year’s end and file a joint tax return. For more details on IRAs, see IRS Publication 590.
— Consider a SEP, Keogh or SIMPLE plan contribution. You may be your own boss or a small business owner, so a Simplified Employee Pension Plan (SEP), Keogh or SIMPLE may be the appropriate avenue to reduce gross taxable income. See IRS Publication 560 for more information.
Note: Making the most of a retirement plan is good for you now and good for you in the future. Don’t pass up this tax tip. Although the deferral amounts for 2008 are unchanged, the maximum limits for IRAs (traditional and Roth) increase to $5,000, or $6,000 if age 50 or above.
MAKE LAST-MINUTE ESTIMATED TAX PAYMENTS
— Underpayment of taxes can result in an unwanted surprise after filing your 2007 return. In addition, the IRS can assess penalties and interest on the underpayment amount. The underpayment penalty can occur whether you are a W-2 employee or self-employed. How can this happen? If you are a W-2 employee, the withholding on your paycheck may be misaligned. If you are self-employed, there are rules about paying estimated taxes.
Note: Making an estimated payment by January 15, 2008, for the short fall amount may resolve this potential tax issue.
MAKE THE MOST OF TAX DEDUCTIONS
— Itemize deductions. The list is myriad and some impose thresholds in order to take the deduction. It can be tempting to take the standard deduction, especially if the filing deadline is imminent.
— Calculate sales taxes. If your sales taxes are more than your state and local income taxes, take this deduction. IRS Publication 600 provides tables to guide in making this decision — based on income and size of household.
— Deduct charitable contributions. To be deductible, you must contribute to a qualified organization. Unfortunately, there are those who pose as charitable entities only to get your money. Before you make a contribution to an organization other than your church or other widely recognized charitable organization, check the IRS website. (Keep in mind, some organizations not listed on the IRS website may be covered by a group exemption, meaning they are subordinate units whose parent organization has received an exemption letter.) Not only can you verify if the organization qualifies, you can check out what the IRS calls its “Dirty Dozen.” This is a list of its top 12 tax scams.
Note: Deductions help reduce your tax liability, but a little research may help you steer clear of tax scams.
DON’T FORGET ABOUT IDS FOR DEPENDENTS
— To claim an exemption for dependents, or potentially, the child’s tax credit, you’ll need an identification number (usually a Social Security number). If you have a baby near the end of 2007, the IRS recommends asking for a filing extension date rather than claiming an exemption without an ID number—see the following tip about filing extensions.
Note: In the absence of an ID number, the IRS will deny the exemption and/or tax credit. Don’t forget, a tax credit reduces tax whereas a deduction reduces your taxable income.
FILE YOUR RETURN ON TIME
— If you can’t get your return filed by April 15, file Form 4868. This form provides an extension until Oct. 15, 2008. Nevertheless, you’ll need to estimate your 2007 tax liability and include payment for the estimated tax with Form 4868. The IRS can impose a late-filing penalty of 4.5 percent and a late payment penalty of 0.5 percent of the tax due. Both penalties are assessed on a monthly basis until paid.
Note: File Form 4868 to avoid the penalties or the denial of a claimed exemption.
DECIDE IF YOU NEED HELP AND WHERE TO GET HELP
— The IRS website (www.IRS.gov) offers a number of fact sheets, tax tips (available Jan. 1), and a toll-free help number at 1-800-TAX-FORM (1-800-829-3676).
— The Tax Advocate Service (TAS) is a free, confidential service within the IRS, available to those experiencing economically difficult circumstances.
— Tax preparation software and services are viable resources.
— Checklists facilitate organization and minimize frustration. Many checklists are available on the web. Just Google “checklists for tax preparation.”
Note: Not all websites provide reliable tax tips. Also, be aware that “2007 tax tips” may refer to the return due in 2007 for the 2006 tax year. Similarly, some references to 2008 apply to tax changes for the 2008 tax year; not 2007.
Sherre Stephens is a certified employee benefits specialist and director of executive services for GuideStone Financial Resources of the Southern Baptist Convention. This article is not intended as a substitute for legal, accounting or professional advice. If legal, tax or other expert assistance is required, the services of a competent professional should be sought.