Now is the time for all good men (and women) to come to the aid of their 2007 tax return.
No, that wasn't a typo. I did not mean to say 2006 tax return.
To repeat - Now is the time for all good men (and women) to come to the aid of their 2007 tax return!
Tax planning is a year-round process that begins on January 1st and continues all year long. To make sure that you will pay the absolute least amount of federal and state income tax possible for 2007 it is important to start the year off right.
Here are some "year-beginning" tax planning tips:
1) It is impossible to know the right moves to make in your daily financial life without a basic knowledge of the tax implications of your actions. Resolve to become more informed on federal and state tax laws. Learn what items you can, and cannot, deduct on your tax return, including the special items that are unique to your trade or profession, and the rules governing any special situations that apply to you, and keep up-to-date on federal and state tax law changes. Even if you use a tax professional to prepare your return, the more informed you are on tax matters, the more prepared you will be when you go to your annual tax appointment. One way to stay on top of things, tax-wise, is to become a regular visitor to THE WANDERING TAX PRO.
2) Set up a good system for maintaining tax records and receipts. Remember that some deductions require special recordkeeping or additional information, such as business meals and entertainment, business use of "listed property" such as automobiles, cell phones and computers, gambling losses, and charitable donations (see tomorrow’s posting). Your tax professional can help you in this area.
3) If you are planning to make a contribution to a traditional or ROTH IRA, a Coverdell Education Savings Account, a Section 529 College Savings Plan, an Archer Medical Savings Account, or a Health Savings Account for 2007 don't put it off. By making your contribution on the first available day of each year you will have substantially more in the account by the time you are ready to retire, or when you need the money to pay for education or medical bills, than if you wait till the last minute.
If you make a ROTH contribution today, and later discover that you are not eligible for a ROTH for 2007, or, for whatever reason, decide you would rather have the funds in a traditional IRA, you have until the due date of your 2007 tax return, including extensions (as late as October 15, 2008) to "recharacterize" your contribution.
4) Make sure, if you are financially able to do so, that you have the maximum amount set aside in your employer's 401(k), 403(b) or 457 pension plan. For 2007 the maximum is $15,500 – plus an additional $5,000 if you will be age 50 or older at the end of the year.
5) If you have excessive credit card debt, consider using a home equity loan to pay off your credit cards. Interest on home equity debt is tax-deductible, within certain limits, while credit card finance charges are not. Plus, home equity interest rates are substantially lower than the rates charged by credit cards. If you choose to do this, monitor your future credit card use to make sure you do not end up back with huge balances.