The IRS filing deadline for your income tax return is days away, so you may fret that there’s little you can do now to save yourself some money. But if you act fast, you can still take advantage of some last-minute tax breaks. Here are six steps you can take to help slash your 2007 tax bill:
- Contribute to a spousal IRA
Make a contribution to an IRA for 2007 up until April 15, 2008. The maximum is $4,000 or $5,000 if you were at least 50 years old by year-end. The catch: It may be hard to deduct those contributions. Say you’re married, filing a joint return, and covered by a 401(k) at work. If your adjusted gross income (AGI) for 2007 was in the $83,000—$103,000 range, your deduction will be less than the maximum. With an AGI of more than $103,000, you’ll get no IRA deduction at all. The loophole: If your spouse is not covered by an employer’s retirement plan, he or she might get a deduction even if your joint AGI is higher. A full deduction is permitted up to $156,000 in AGI, partial deductions up to $166,000.
- Contribute to a Simplified Employee Pension (SEP)
If you had any self-employment income last year, you can contribute around 20% of that income to a SEP, to a maximum write-off of $45,000. As the name indicates, the paperwork is simple–any bank, brokerage firm, or mutual fund company can walk you through the setup process. “Contributions are deductible up to the date your return is due,” says David Kahn, managing director in the New York City office of the accounting firm RSM McGladrey Inc.
- Track your purchases for 2007
You have a choice for 2007: You can deduct the state and local income taxes you paid or the sales tax you paid, whichever is greater. IRS Publication 600 has tables that provide an average sales tax for your family size, income level, and state. What’s more, if you bought a boat, car, plane, home, home building materials, or other big-ticket items subject to sales tax last year, you can add the sales tax you paid on those items to the amount from the IRS tables, according to Kahn. If that total is greater than the state and local income taxes you paid, take the sales tax deduction.
- Review your investment records
If you sold investments last year, you’ll have taxable gains or losses to report. While you’re filling out Schedule D of Form 1040, go over all your records since the date of purchase to see if you reinvested any dividends or distributions. Suppose you bought a mutual fund in 1999 for $10,000 and sold it last year for $12,000. Is that a $2,000 taxable gain? Not necessarily. A check of your records might show you reinvested $2,300 worth of income distributions (from dividends) and capital gains distributions. If so, your “basis” in that fund was really $12,300: the $10,000 you paid upfront and $2,300 you reinvested. If you sold for $12,000, you’ll owe no tax