The summary: Do whatever you can to delay receiving income for the year, and hunt for whatever deductions you can find so that when you prepare your tax return in a few months, the outcome is as painless as possible.
- Take steps now to reduce taxes
- Gradual retirement may not be key to happiness
- Unused vacation days could fatten 401(k)
- Americans may not be up to savings challenge
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that
- Taking stock
- Holiday season looks rough for investors in retail stocks
- The week ahead
But what do you do when you aren't sure what next year's rule book might say?
That's where taxpayers stand this year. Members of Congress, such as Rep. Charles Rangel (D-N.Y.), are proposing a major tax overhaul. So as you plan for the end of 2007 and early 2008, the rule book could end up very different.
In essence, with your year-end tax planning this year, you are aiming at a moving target for next year. Still, Northern Trust tax strategist Grace Allison said: "Don't let uncertainty lead you down the path of inertia."
While there is no certainty, she and other strategists are urging taxpayers to consider moves now that might not be available in the future.
For example, if people have large holdings in a single stock they can sell it now and diversify their holdings, while only paying a maximum 15 percent capital gains tax. "The 15 percent capital gains tax probably won't be there forever," Allison said.
Although the future remains murky, tax planners are urging the following moves:
-- Do a quick checkup
Rather than waiting for unpleasant tax surprises when you sit down with your return, pull out a recent pay stub, calculate about what you will earn for the year, and look at how you stand compared with last year, said Rande Spiegelman, vice president of financial planning for Charles Schwab.
There are valuable tax credits you don't want to miss, but they have income limits. For example, the child tax credit--which can lower your tax bill by $1,000 per child--starts to phase out if you are single and your modified adjusted gross income exceeds $75,000, or married with income over $110,000. A credit for up to $11,390 in adoption expenses diminishes after a couple's income crosses $170,820. Or collecting the maximum Hope and Lifetime Learning Credits for college tuition starts to phase out when income goes over $45,000 for singles or $90,000 for married couples.
So if you are close to going over the limits you might be able to keep your income down by using strategies such as making extra 401(k) contributions before the end of the year. Individuals can put as much as $15,500 into a 401(k) this year, and an additional $5,000 if they are 50 or older.
To check where you stand on income and possible deductions, pull out last year's tax software and plug in this year's numbers. Keep in mind that cut-off limits on income and deductions change from year to year, so find 2007 rules at www.irs.gov.
-- Don't waste money
If you set up a flexible spending account at work to fund medical expenses or pay for child-care expenses, make sure you use it up. Depending on your company, you might have to use it by the end of this year, although some plans give you until March 15 to use the money.
If you have money to spare, you could spend it on glasses, contacts or medical equipment.
And if you haven't set up a flexible spending account for next year and your employer offers one, do it before the enrollment period expires. "It's a great way to get a tax benefit because there is no hurdle to overcome," said Joseph Karczewski, managing partner at WTAS, a tax and consulting firm. Just make sure you calculate what you are likely to spend for medical expenses like deductibles or other fees not covered by your insurance. If you set aside too much, you could waste the money. But the money you do set aside is not taxed.
-- Use medical deductions