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Wednesday, November 07, 2007

Seven Ways to Take Control of Your 2007 Tax Bill

When it comes to cutting your 2007 tax bill, there's no time like the present, says the Texas Society of CPAs. Here are some tax strategies you can put into action now to reduce your 2007 tax bill.

One of the best ways to trim your tax bill is to make the maximum allowable contribution to your retirement savings plan. For 2007, employees may contribute up to $15,500 of their pre-tax salary to a 401(k) and the fund grows tax-deferred until withdrawn. Workers who will be at least age 50 by the end of the year may contribute up to an additional $5,000 per year. The IRA contribution limit for the 2007 tax year remains at its 2006 level of $4,000 ($5,000 for taxpayers who are age 50 or older).

Income you don't receive by December 31 isn't taxed until the following year. While employees on salary don't have much of a choice regarding when they get paid, taxpayers who are self-employed or do freelance or consulting work have more flexibility. By delaying billing until late December, you can postpone the receipt of income into next year. Keep in mind that this strategy only makes sense if you think you will be in the same or a lower tax bracket next year.

By prepaying certain 2008 bills in 2007, you may be able to write off a deduction earlier. For example, when you pay your January 2008 mortgage bill on or before December 31, you may deduct an extra month of interest in 2007. If it's not included, remember to add the extra month's interest amount to the amount reported by your lender on your 1099 form. Paying your state income taxes or property taxes early is another way to accelerate your federal deductions for 2007 if you aren't subject to alternative minimum tax.

If your portfolio experienced significant capital gains in 2007, consider whether it makes good financial sense to sell off some of the losers. You can use the amount of your losses to offset capital gains. And if your capital losses are larger than your capital gains, you can deduct the capital loss against other income, such as your salary -- up to a limit of $3,000 in one year. Any additional losses can be carried over into subsequent years, when they can be used to offset future capital gains.

Consumers who purchase and install specific improvements in their principal residence, such as exterior windows and doors, insulation to walls, ceilings, high efficiency water heaters, furnaces and boilers, and central air conditioning units can receive a tax credit of up to $500. But hurry -- energy-efficient tax credits apply to improvements made between January 1, 2006 and December 31, 2007.

Doing good for others can do good to your tax bill. Donations made before the end of the year are a great way to cut your 2007 tax bill. Keep in mind, however, that effective for 2007, all money contributions, regardless of the amount, require substantiation by a canceled check or a receipt from a charity. Previously, receipts were required only for contributions of $250 or more.

Donate appreciated property or stock rather than cash and you may save even more by avoiding paying capital gains taxes. Just be sure you understand the rules and give yourself plenty of time because it could take several weeks to transfer the stock or property.

Do you still have money left in your flexible spending account? While the IRS now allows companies to give their employees a two-and-one-half month grace period to spend money set aside in a flex spending account, not all businesses have adopted this extension. If you have money left that needs to be spent before December 31, don't wait until the last minute.

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