It's time to plan for April 15
BY TERRY SAVAGE Sun-Times Columnist Dec 17, 2007
Updated: May 3, 2013 12:14PM
Don't come whining to me looking for tax deductions in April when you finally get around to doing your tax return.
The time to act is now -- at year-end -- when no one wants to think about taxes. But if you want to save tax dollars in the spring, here's what you should be doing,
Give money away
It's the season to be charitable -- and charity begins at home. Gifts of cash to family and friends aren't deductible, because they aren't IRS-recognized charities. But those gifts could reduce your ultimate estate tax (depending on when you die).
You can give $12,000 to any number of people if you care to spread your wealth. One good option: Open a 529 College Savings Account, and you can combine up to five years of the annual gift -- for a total of $60,000 -- to grow tax-free over the years to pay for college expenses.
Do your charitable giving smartly. If you want to be sure your tax-deductible donation is going to be put to good use, go to www.guidestar.org, where you can check on a charity as well as make an instant donation through the Web site.
Or open an account in a Charitable Gift Fund, such as those offered by Fidelity, Vanguard, T. Rowe Price and Charles Schwab, to name a few. You get an immediate tax deduction, and the money grows tax-free inside the fund until you give directions to make a distribution to an IRS-recognized charity later.
Pre-pay deductible expenses
If you can't decide whether to itemize your tax return, the decision might be easier if you "bunch" your tax-deductible items in one year -- building a pile of deductions that will offset the effort of filing a longer return in the spring. Here are some things to consider:
**Prepay your property taxes in December so you can take a deduction this year.
**If you pay quarterly estimated taxes, pay your January estimate tax in December to get the deduction this year.
**Pay your January mortgage payment in December to get the interest deduction in 2007.
**If you're self-employed, postpone your bonus until January, lowering your taxable income this year, while taking all possible deductions now.
Of course, this strategy means that next year's tax bill could be higher even if rates don't change. That's why it pays to figure out your total income for the year, and your tax bracket to see whether the strategy of "bunching" will work for you.
Use other year-end deductions
There might be some easy deductions that you overlook because you're simply unaware.
Go to www.turbotax.com for a free look at their 2007 tax return software. Run your scenarios online to get a look at all possible deductions you qualify to take before year-end. (The process is free; you don't pay unless you print or file your tax return using the software.)
Turbo-Tax notes that the online software also has a tool to see if you'll be affected by the Alternative Minimum Tax if the tax is extended.
**Prepay January 2008 tuition for your college students in December 2007 to qualify for either Hope or Lifetime Learning credits.
**Buy that fuel-efficient car now to claim a tax credit on your 2007 tax return, up to a maximum of $3,400. Go to www.fueleconomy.gov to see which cars qualify.
**The Energy Tax Act provides a credit of up to $500 for qualified energy-efficient home improvements, so install the new furnace or energy-efficient windows now.
All these strategies require that you spend time now to get your finances organized for next year's taxes. That's an investment of time that will bring much better returns in the New Year than charging up your credit cards with holiday shopping. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.