7 year-end tax-saving moves
Congress may be taking its time to protect you from the AMT, but that doesn't mean you can't make some last-minute moves to reduce your tax bill.
NEW YORK (CNNMoney.com) -- You probably don't know what your federal tax liability will be for 2007, and Congress certainly isn't helping. Lawmakers have yet to pass a temporary fix to the Alternative Minimum Tax, to prevent 21 million of us from having to pay the so-called wealth tax.
But that doesn't mean you can't take a number of steps now to reduce your bill, whatever it turns out to be.
Here are some year-end tips culled from tax information publishers CCH and J.K. Lasser, the New York State Society of CPAs, and the National Association of Tax Practitioners.
1. Re-energize your house
If you were thinking of going green in your home, you've got about a month left to do so and still get credit for it. That's because two key energy tax credits are scheduled to expire at the end of this year. A credit is a dollar-for-dollar reduction of your tax bill.
You can reduce your tax bill by up to $500 if you install insulation, windows, doors or central air conditioning that meet certain energy conservation standards.
You also can take a credit up to $2,000 if you install a solar-powered hot water system or solar photovoltaic panels, which convert sunlight into electricity.
There are constraints on how much you can take for any one type of installation (e.g., no more than $200 for windows), so check here for the specifics.
2. Cut your capital gains tax
With all the punishing volatility in stocks this year there's a good chance you've got some capital losses in your taxable investment accounts that you could take to offset any capital gains you've realized this year.
Your losses can offset 100 percent of your capital gains plus up to another $3,000 in ordinary income. If you have losses beyond that you can carry them forward to use on future tax returns.
One caveat, though: your loss will be disallowed if you reinvest in the same stock or fund that you sold within 30 days before or after the sale.
3. Maximize savings tax breaks
While it's never too late to start saving, it can be too late if you want your contribution to count as deductible for a given tax year.
You have until Dec. 31 to make a 2007 tax-deferred contribution to your 401(k) -- that will reduce your adjustable gross income and therefore your tax bill. The maximum contribution you may make this year is $15,500 (or $20,500 if you're 50 or older).
When it comes to deductible IRAs, to which you may contribute up to $4,000 this year, you will have until April 15, 2008 to both set up the IRA (if you haven't already done so) and make your 2007 contribution. (Check here to see if you qualify to make deductible contributions to an IRA.)
If you're self-employed and want to set up a profit-sharing Keogh plan, you must do so by Dec. 31. But you will have until your tax return due date (which may be as late as Oct. 15, 2008) to make a contribution and have it count for 2007. The maximum you may contribute is 100 percent of compensation or $45,000, whichever is less.
If you have a Simplified Employee Pension (SEP) IRA, you have until the due date of your tax return to both set up the account and make your 2007 contributions, which can't exceed $45,000.
If you need added incentive to save, you may qualify for an income tax credit up to $2,000 for your IRA or workplace retirement plan contributions. The saver's credit, as it's called, is available to taxpayers whose adjusted gross incomes are $25,000 or less for single filers, or $50,000 or less for married couples filing jointly.
4. Time your bonuses and investment gains
There are times when it makes sense for tax purposes to either defer or accelerate taking income or selling an investment.
Generally speaking, if you're in a high tax bracket it may reduce your tax bite if you postpone some income to next year. That's because the income ranges that apply to each tax bracket go up with inflation annually, so more of your income will be taxed in 2008 at lower rates.
The kinds of payments you might consider postponing: a bonus or payment of bills from your clients if you run a small business. In order for it to be considered 2008 income, the checks must be issued in 2008. If you get a check in 2007 and just don't deposit it, it will still count as 2007 income.
For retirees planning to take large distributions from their IRAs, it may make sense to take part in December and part in January. By doing so, "you may avoid moving to a higher tax bracket in either year, and keep more of your Social Security benefits from being taxed as well," said Mark Luscombe, CCH's principal federal tax analyst, in a statement.
On the other hand, there are cases when it may pay to take more of your income this year. For instance, if you're planning to sell some appreciated stocks or funds and you have a good chance of being in the 10 percent or 15 percent tax bracket next year if you take more income this year, you'll enjoy a 0 percent capital gains and dividend rate in 2008.
5. Time your deductions
If your last 2007 property tax bill is due in January, opting to pay it in December will boost your deductions for this year, unless you're subject to the Alternative Minimum Tax, which disallows deductions for property taxes. You also might consider making an extra mortgage payment this year since you can deduct the extra interest.
The same principle applies to any other itemized deductions such as charitable contributions, job-related deductions or medical procedures (if you think your medical costs for the year will exceed 7.5 percent of your adjustable gross income).
6. Mind the aging kiddie
The kiddie tax governs how a child's capital gains, dividends and interest are taxed. A portion (currently the first $850) is tax free, another portion (currently the next $850) is taxed at the child's tax rate (typically 5% to 10%), and anything beyond that threshold is taxed at the parents' (typically higher) rate.
The kiddie tax still applies only to those under 18. But starting next year, it will snare an older group -- specifically, those under 19 or to full-time students under 24 who don't earn enough to pay for at least half their support.
So if your children are between 19 and 23 this year and are in the 15 percent tax bracket or less, they might do better to sell some of their appreciated assets now because their capital gains and dividend rate is only 5 percent. If they wait until next year, they'll once again be subject to the kiddie tax, and a portion of their gains and dividends may be subject to your tax rates.
7. Make charitable contributions
Generosity is a tax-deductible event.
If you make a cash donation, you have to substantiate it with a letter or receipt from the organization, a cancelled check or a bank statement showing the donation. Any documentation must include the name of the charitable organization as well as the date and amount of the contribution.
If you donate clothes or household items, you can only take the deduction if they are in good condition.