(ABP) — According to some estimates, two out of five Americans procrastinate when it comes to filing their tax returns. But experts agree that early preparation for the upcoming tax season is best. Here are some tips to aid in preparing 2007 tax returns.
1. Identify last-minute savings opportunities.
— Maximize retirement plan elective deferrals. The 2007 basic deferral limit is $15,500 or $20,500 for those older than 50. Filers who did not max out deferrals for 2007 should consider an IRA.
— Contribute to a traditional IRA. Eligibility for making deductible contributions to a traditional IRA depends on two factors: 1) whether the individual is covered by a retirement plan at work and 2) modified adjusted gross income. The maximum contribution limit for 2007 is $4,000, or $5,000 for those older than 50. Remember, a nonworking spouse may be eligible for an IRA, and an additional deduction can be beneficial. Qualifiers must be legally married at year's end and file a joint tax return. For more details on IRAs, see IRS Publication 590.
— Consider a Simplified Employee Pension Plan, Keogh or SIMPLE plan contribution. The self-employed or the small business owner may find that these are the appropriate avenues to reduce gross taxable income. See IRS Publication 560 for more information.
Making the most of a retirement plan is good now and good in the future. Although the deferral amounts for 2008 are unchanged, the maximum limits for IRAs (traditional and Roth) increased to $5,000 or $6,000, for those older than 50.
2. Make last-minute estimated tax payments.
Underpayment of taxes can result in an unwanted surprise after filing 2007 tax returns. In addition, the IRS can assess penalties and interest on the underpayment amount. The underpayment penalty can occur whether the filer is a W-2 employee or self-employed.
How can this happen? For W-2 employees, the withholding on their paychecks may be misaligned. For the self-employed, there are rules about paying estimated taxes.
Fortunately, making an estimated payment by Jan. 15, 2008, for the shortfall amount may resolve this potential tax issue.
3. Make the most of tax deductions.
— Itemize deductions. The list of possible deductions is myriad, and some impose thresholds in order to take the deduction.
— Calculate sales tax. If sales taxes are more than state and local income taxes, take this deduction. IRS Publication 600 provides tables to guide in making this decision based on income and household size.
— Deduct charitable contributions. Organizations must qualify in order to be deductible. Unfortunately, there are those who falsely pose as charitable entities. Before making a contribution to an organization other than a church or other widely recognized charitable organization, check the IRS Web site. Not only will it verify whether the organization qualifies, it will list the “dirty dozen” — its top 12 tax scams.
Keep in mind, some organizations not listed on the IRS Web site may be covered by a group exemption, meaning they are subordinate units whose parent organization has received an exemption letter.
The bottom line? Deductions help reduce tax liability, but a little research may help eliminate tax scams.
4. Don't forget about IDs for dependents.
A claim for an exemption for dependents, or the child's tax credit, takes an identification number (usually a Social Security number). If a child is born near the end of 2007, the IRS recommends asking for a filing extension date rather than claiming an exemption without an ID number.
In the absence of an ID number, the IRS will deny the exemption and/or tax credit. A tax credit reduces tax whereas a deduction reduces taxable income.
5. File the return on time.
If the tax return is not filed by April 15, 2008, file Form 4868. This form provides an extension until Oct. 15, 2008. Nevertheless, later filers will need to estimate their 2007 tax liability and include payment for the estimated tax with Form 4868. The IRS can impose a late-filing penalty of 4.5 percent and a late payment penalty of 0.5 percent of the tax due. Both penalties are assessed on a monthly basis until paid.
Late files can also file Form 4868 to avoid the penalties or the denial of a claimed exemption.
6. Decide whether or not to get help, and where.
— The IRS web site, www.IRS.gov, offers a number of fact sheets, tax tips and a toll-free help number: 1-800-TAX-FORM.
— The tax advocate service is a free, confidential service within the IRS, available to those experiencing economically difficult circumstances.
— The Internet offers copious tax helps.
— Tax preparation software and services are viable resources.
— Checklists facilitate organization and minimize frustration. Many checklists are available on the web.
Finally, be aware that “2007 tax tips” may refer to the return due in 2007 for the 2006 tax year. Similarly, some references to 2008 apply to tax changes for the 2008 tax year, not 2007.
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— Sherre Stephens is a certified employee benefits specialist and director of executive services for GuideStone Financial Resources of the Southern Baptist Convention.