As tax season approaches, consider these tax-filing tips comment (0)
January 3, 2008
By Sherre Stephens
Need some help getting ready for tax season? Here are some tips to get prepared:
- Early preparation for the upcoming tax-filing season is best. A survey for the 2006 tax season showed 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 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. 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 Internal Revenue Service (IRS) Publication 590.
- Consider a simplified employee pension plan (SEP), Keogh or SIMPLE plan contribution. You may be your own boss or a small business owner, so a SEP, Keogh or SIMPLE may be the appropriate avenue to reduce gross taxable income. See IRS Publication 560 for more information.
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 Jan. 15, 2008, for the shortfall 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 Web site (www.IRS.gov). (Keep in mind some organizations not listed on the IRS Web site 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.
Don’t forget about IDs for dependents.
- To claim an exemption for dependents, or potentially the Child Tax Credit, you’ll need an identification number (usually a Social Security number). If you had 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, 2008, 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.
Decide if you need help and where to get help.
- The IRS Web site offers a number of Fact Sheets, Tax Tips (available Jan. 2, 2008) and a toll-free help number 1-800-TAX-FORM (1-800-829-3676).
- The Tax Advocate Service is a free, confidential service within the IRS, available to those experiencing economically difficult circumstances.
- The Internet offers copious tax helps.
- Tax preparation software and services are viable resources.
As of this writing, Congress has not acted on reforming the Alternative Minimum Tax (AMT). It’s anticipated that the AMT will impact nearly 4 million taxpayers this year. Reform could still happen.
Should this happen the IRS will have to delay processing tax returns until March instead of its normal start date of mid-January.
EDITOR’S NOTE — Sherre Stephens is a certified employee benefits specialist and director of executive services for GuideStone Financial Resources of the Southern Baptist Convention.