Don't come looking for tax deductions next April when you finally get around to doing your tax return. The time to act is now -- at year's end -- when no one wants to think about taxes. If you want to save tax dollars next spring, here's what you should be doing now:
Give Money Away
It's the season to be charitable, and charity begins at home. Gifts of cash to family and friends aren't deductible, because they aren't IRS recognized charities -- but those gifts could reduce your ultimate estate tax (depending on when you die). You can give up to $12,000 to any number of people if you care to spread your wealth.
One good option: Open a 529 College Savings Account and you can combine up to five years of the annual gift -- for a total of $60,000 -- to grow tax-free over the years to pay for college expenses. (Tip: If you don't have children or grandchildren, open an account anyway in your name, and then you can transfer the tax-free assets for use of a "future child" to pay for college!)
Be smart about your giving. If you want to be sure your tax-deductible donation is going to be put to good use, go to
www.guidestar.org, where you can check on a charity as well as actually make an instant donation online.
Or open an account in a charitable gift fund, such as those offered by
T. Rowe Price
( SCH), to name a few. You get an immediate tax deduction, and the money grows tax-free inside the fund until you give directions to make a distribution to an IRS-recognized charity in future years.
Also note: Starting with the 2007 tax year, a record of the donation in the form of a receipt, canceled check or bank record is required as proof of a charitable contribution, regardless of the amount. Previously, only contributions of $250 or more (for a single item) required receipts. When gifting merchandise, an appraisal of the
fair market value is required.
Pre-Pay Deductible Expenses
If you can't decide whether to itemize your tax return, consider "bunching" your tax-deductible items in one year -- building a pile of deductions that will offset the effort of filing a longer return next spring. Here are some things to consider:
- Prepay your property taxes in December, so you can take a deduction this year. (Most assessor/collectors offices will give you the bill in December.)
- If you pay quarterly estimated taxes, pay your January estimated tax in December to get the deduction this year.
- Pay your January mortgage payment in December to get the interest deduction in 2007
- If you're self-employed, postpone your bonus until January, lowering your taxable income this year, while taking all possible deductions now.
Of course, this strategy means that next year's tax bill could be higher - even if rates don't change. That's why it pays to figure out your total income for the year, and compare against your tax bracket to see whether the strategy of "bunching" deductions and postponing income will work for you. Here's a
link to the IRS 2007 tax brackets to help you make that decision.
Use Other Year-End Deductions
There might be some easy deductions that you overlook because you're simply unaware. Go to
www.turbotax.com for a free look at their 2007 tax return software. Run your scenarios online to get a look at all possible deductions you qualify to take before year-end. (The process is free; you don't pay unless you print or file your tax return using their software.) Turbo-Tax notes that the online software also has a tool to let you see if you'll be impacted by the alternative minimum tax.
- Prepay January 2008 tuition for your college students in December 2007. This will increase the amount of tuition you can claim for either Hope or Lifetime Learning credits.
- Buy that fuel-efficient car NOW! If you take delivery of a qualified hybrid or alternative fuel motor vehicle before January 1, 2008, you may claim a tax credit on your 2007 tax return, up to a maximum of $3,400. Here's a link to the government website that shows which cars qualify.
- The Energy Tax Act provides a credit of up to $500 for qualified energy-efficient home improvements, so install the new furnace or energy-efficient windows now.
All of these strategies require that you spend time now to get your finances organized for next year's taxes. That's an investment of time that will bring much better returns in the new year than charging up your credit cards with holiday shopping. And that's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,
The Savage Number: How Much Money Do You Need?
in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.