It may only be October, but now is a good time to work on cutting your 2007 tax bill, say officials with the Pennsylvania Institute of Certified Public Accountants.
Here are some strategies you can put into action:
· Max out retirement savings. One of the best ways to trim your tax bill is to make the maximum allowable contribution to your retirement savings plan.
For 2007, employees may contribute up to $15,500 of their pre-tax salary to a 401(k). Workers who will be at least age 50 by the end of the year can contribute up to an additional $5,000 per year.
IRA contribution limits for the 2007 tax year remain at the 2006 level of $4,000, or $5,000 for taxpayers age 50 or older.
· Defer income. Income you don't receive by Dec. 31 isn't taxed until the following year. Employees on salary don't have much of a choice regarding when they get paid, but taxpayers who are self-employed, or do freelance or consulting work, have more flexibility.
By delaying billing until late December, you can postpone receipt of income into next year. Keep in mind, this strategy only makes sense if you think you will be in the same or a lower tax bracket next year.
· Pay some bills early. If you prepay certain 2008 bills in 2007, you may be able to write off a deduction earlier. For example, if you pay your January 2008 mortgage bill so your lender receives payment by Dec. 31, you may deduct an extra month of interest in 2007.
Paying state income taxes or property taxes early is another way to accelerate federal deductions if you aren't subject to alternative minimum tax.
· Take a loss. If your portfolio experienced significant capital gains in 2007, consider whether it makes good financial sense to sell off some of the losers.
You can use the losses to offset capital gains. If your capital losses are larger than your capital gains, you can deduct the capital loss against other income — up to $3,000 in one year. Any additional losses can be carried over into subsequent years, when they can be used to offset future capital gains.
· Go green. Consumers who purchase and install specific improvements in their principal residence — such as exterior windows and doors; insulation to walls and ceilings; and high-efficiency water heaters, furnaces and boilers — as well as central air-conditioning units, can receive a tax credit of up to $500.
But hurry — energy-efficient tax credits apply to improvements made between Jan. 1, 2006, and Dec. 31, 2007.
· Be giving. Doing good for others can do good to your tax bill.
Donations made before the end of the year are a great way to cut your 2007 tax bill. Keep in mind, however, that effective for 2007, all monetary contributions, regardless of the amount, require substantiation by a canceled check or a receipt from the charity.
Previously, receipts were required only for contributions of $250 or more.
Donate appreciated property or stock, as opposed to cash, and you may save even more by avoiding paying capital-gains taxes. Just be sure that you understand the rules and give yourself plenty of time, because it could take several weeks to transfer the stock or property.
· Spend that flexible account. Do you still have money left in a flexible spending account? The IRS now allows companies to give employees a 21/2-month grace period to spend money set aside in such an account, but not all businesses have adopted this extension.
If you have money left that needs to be spent before Dec. 31, don't wait until the last minute. Use it now!