Blueprint For Tax Savings
Filing your 2006 tax return might signal the official end of 2006, but for tax-savvy individuals, it's also the kick-off for saving taxes in 2007. Getting an early start on your 2007 tax planning will help you take maximum advantage of the latest tax breaks, inflation adjustments, and retirement options.
• First, commit to maximizing your retirement plan contributions. This will lower your 2007 taxable income and enhance your nest egg to boot. If you have an IRA, consider making contributions earlier in the year to reap extra tax deferred earning.
• Second, minimize any surprises next year by examining your paycheck withholdings now. Are tax withholdings on track with your current financial situation? A large tax refund or amount due on your 2006 return might require an adjustment to your Form W-4 for 2007. Additional factors to consider include recent changes to family income, a new home, or children not longer qualified as dependents.
• A law enacted last year extends the age threshold for taxing children's unearned income at the parent's higher tax rate. Now the “kiddie tax” applies until the child reaches age 18. This might be a good year to consider a 529 college saving plan as an alternative to transferring funds directly to a child’s account.
• And don't forget to take advantage of available energy tax credits this year. Qualified home improvements can trim your utility bills and lower taxes at the same time.
• Staying abreast of new tax laws is always a good idea, and this year is no exception. For instance, taxpayers age 70 ½ and older can now make charitable donations directly from their IRA without paying tax on the distribution. In addition, the payments satisfy the required minimum distribution obligation. So if you are charitably inclined and don’t need your IRA distributions to live on, this might be a winning strategy.
• The most common tax-related resolution--and the hardest to keep--is a vow to maintain better tax records. The deductions for higher education expenses and teacher’s out-of-pocket expenses have been reinstated for 2007. These and other deductions and credits could be lost if you don’t have a satisfactory recordkeeping system.