By James H. Barr, CPA
1. Reduce Income
Max out contributions to your qualified employer retirement plan and your IRA. In many cases, contributions to your traditional IRA may be tax deductible. Contributing to your 401(k), 567 or 403(b) plan may reduce your taxable income and may have the added bonus of an employer match. Employer matches are the equivalent of receiving free money, and even a 1% match may compound into several thousand dollars of savings over time.
If you’re self-employed, open a business retirement account such as a SEP-IRA, SIMPLE IRA, qualified retirement account (QRP)/Keogh, or individual 401(k). Contributions are tax-deductible and grow tax-deferred.
Is there income you could delay taking this year, so it goes on your 2008 return? Are there expenses (state and local taxes, for instance) you could take in 2007 so the deduction goes on this year’s return?
2. Increase Your Deductions
The IRS allows taxpayers to deduct certain items, such as medical and dental expenses, state income taxes, local income taxes, real estate taxes, state personal property taxes, local personal property taxes and home mortgage interest.
Consider using appreciated investments (stocks, bonds, etc.) as a contribution – you get the market value contribution as a deduction on your 2007 income. There is no capital gain resulting from this contribution made.
You also may want to consider prepaying the second installment of your property tax or making January mortgage payments in December. Advise paying by December 20, 2007, to ensure the mortgager give you credit in 2007. Mortgage interest on a primary residence is usually fully tax-deductible, unless your mortgage balance exceeds $1 million. However, keep in mind that the Alternative Minimum Tax (AMT) ignores some itemized deductions, such as investment expense, employee business expenses and some medical and dental expenses.
Take Advantage of Capital Losses
Gather your investment losses from taxable accounts by December 31 to offset any capital gains and/or up to $3,000 of ordinary income (up to $1,500 each if you’re married filing separately). You may carry over any unused losses to future tax years without expiration.
3. Here Are Deductions Taxpayers Often Overlook:
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Using you car in connection with charitable work.
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Health insurance premiums if you are self-employed.
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Out-of-pocket costs if you moved for work-related reasons.
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Education expense if the schooling was necessary to maintain or improve your work skills.
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Eyeglasses, contact lenses, dentures and hearing aids.
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Programs to help you stop smoking.
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Premiums on long-term care insurance.
4. Gifting
Consider gifting to family or whomever, an individual may gift up to $12,000 to any individual or with a joint return $12,000 each for a total of $24,000. This will not reduce your 2007 income; however it could potentially reduce your 2008 taxable investment income.
It all comes down to planning; take the time now instead of waiting until December, 2007, when it may be to late.
James H. Barr, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. LP. He may be reached at Jbarr@mmb-co.com.
Reprinted with permission of The Daily Record 2007
