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.

1. TAKE RETIREMENT SAVINGS TO THE MAX
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2007, employees may contribute up to $15,500 of their pre-tax salary to a 401(k) and the fund grows tax-deferred until withdrawn.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).

2. DEFER INCOME
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.

3. PAY SOME BILLS EARLY
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.

4. TAKE A LOSS
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.

5. GO GREEN
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.

6. BE GIVING
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.

7. DRAIN YOUR FLEXIBLE SPENDING ACCOUNT
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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IRS Performance Sees Some Improvement This Year, Investigators Find

The Internal Revenue Service’s (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers, according to a new report by the Government Accountability Office (GAO). This year’s filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax, says GAO, which is the nonpartisan investigative arm of Congress.

IRS’s interim filing season performance is improved in some areas, GAO says. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater, it says.

"Taxpayers’ ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers’ questions was about the same," the report says. "Use of IRS’s Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance," GAO says.

Other areas still require IRS improvement, the investigators find.

"Taxpayers’ use of the Free File program, which provides free tax preparation and electronic filing through IRS’s Web site—is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year," GAO says.

Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date, the report says.

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Association Offers Last-Minute Tax Tips for Self-Employed

It's April, and U.S. tax day is right around the corner but small-business owners submitting their 2006 tax returns are in luck -- everyone gets two extra days to submit their forms because April 15 falls on a weekend and April 16, Emancipation Day, is a holiday in Washington, D.C.

Those two extra days provide valuabletime for entrepreneurs rushing to file. "Don't be tempted to take shortcuts or make up numbers that you thinkyou won't have time to calculate correctly because that will increase yourchances of making a math mistake," says Keith Hall, national tax adviser for the National Association for the Self-Employed (NASE). "It's important to remember that you're not alone since there are a number of resources out there to help micro-business owners, even for those last minute filers."

For those micro-business owners who find themselves running out oftime, the NASE offers these tips to help filers waiting until the April17 deadline:

• Check for hidden deductions: There are a number of deductions that small business owners and the self-employed forget when filing taxes. If you work out of your home, your office may qualify for a deduction. Do you drive to the post office or a client site? Those miles may add up to a sizable deduction too.


• Retirement Savings: Retirement savings are deductible for last year's tax return up until April 17 of this year. That means you can count money deposited into retirement savings in 2007, up until the day you file, on your 2006 tax return.


• Filing Date: If, despite all your rushing around, you still can't make the April deadline, relax. All tax filers can get an automatic 6-month extension by filing Form 4868 by April 17, which you can download from the IRS Web site. However, an extension of time to file is not an extension to pay. If you do not send the IRS what you think you owe in taxes by April 17, you'll be subject to late fees and interest.


• Check your math: Most of the mistakes on tax returns are simple addition and subtraction errors. Check your math. Then, check your math again.


• Start thinking about next year: While small business owners may be tempted to finish their return and not think about taxes again until next year, now is a great time to reflect on how to reduce your 2007 tax liability. Consider deductions for a home office or employing your children; create a medical reimbursement plan, which would enable the business to reimburse the employee for all out of pocket medical expenses; reconsider the tax implications of incorporating your business; and research retirement plans designed specifically for the self-employed, including an IRA, SIMPLE, SEP, Single 401(k), and Keogh plan.


• Look for help: Sole proprietors doing their own taxes can find help from a number of sources, including Schedule C from A to Z, a line-by-line guide for completing the tax form Schedule C, available online.

Additionally the IRS offers a toll- free help line, 1-800-829-1040, which offers assistance to small businesses.


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Online Tax Filing Up, Internet Security Fears are Down

More consumers are filing their taxes online, and fewer are concerned about Internet security, The Conference Board and TNS report.

This year, 39 percent of consumers intend to file their 2006 federal taxes online, up from 28 percent just three years ago. Online tax filing is a growing trend. Close to two-thirds of consumers report having filed online for three or more consecutive years, of which nearly half have been filing online for more than five years.

"Speed, convenience and choice are compelling an increasing number ofconsumers to toss their pencils and papers and file their federal taxes electronically," says Lynn Franco, director of The Conference Board Consumer Research Center. "Whether using professional tax services or do-it-yourself software, electronic filing continues to grow year after year. And, by far, direct deposit is the preferred refund method. This year's ability to split refunds among up to three accounts is yet another choice that should broaden the appeal of electronic filing."

The Consumer Internet Barometer - produced by The Conference Board, the global business research and membership organization, and TNS, a global market insight and information group - surveys 10,000 households across thecountry and tracks who's doing what on the Internet.

Among consumers intending to file their federal taxes online, nearly 40 percent intend to use a professional tax service, with women more likely than men to seek assistance. Do-it-yourself tax software is more popular among male filers than female filers. The number of online filers using IRSe-file has declined since 2004, as the pool of eligible filers has likely shrunk due to increased complexity in returns and as more alternatives become available. Slightly more women than men (20 percent versus 19 percent) will use IRS E-file.

Consumers are less concerned about security when filing taxes online. Today only 43 percent of Internet users are "extremely" concerned aboutfiling taxes online, down from 52 percent in 2004.

Last year, more than 70 percent of online tax filers chose to receive their refund by direct deposit while 18 percent requested a check. The ease and convenience of direct deposit clearly makes it the preferred choice of online tax filers.

Among those who do not file online, the leading reason cited is that the consumer does not do his/her own taxes (34 percent). Coming in second (23 percent) are concerns about personal information on the Internet.

The Consumer Internet Barometer is based on a quarterly survey of10,000 households. A unique sample is surveyed each quarter. Return ratesaverage 70 percent, which ensures highly representative data. Data is weighted as well to reflect the latest U.S. household demographic information. The latest survey was conducted during the first quarter of2007.

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Not a Tax Increase -- Make Tax Cheats Pay

Tax cheats cost the U.S. government $350 billion annually, which is the difference between what is owed and what is actually being paid, according to the new chairman of the Senate Budget Committee.

The federal government needs to deal with its budget deficit and the chairman says collecting more revenue from taxes already legally owed it, he says.

"We’re not talking about a tax increase here. We’re not talking about increasing any rate. We’re talking about collecting the money that is due and owed under the current law," the chairman says.

Read the full story at our new sister blog, On The Hill.



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Future Tax Policies Should Maximize Economic Growth

A new study from the National Center for Policy Analysis (NCPA) says conservatives and liberals should agree on one thing: tax policies should be structured to maximize economic growth.

According to the study, tax policies that maximize economic growth will result in a government that is smaller in size relative to the economy, but will furnish the most possible government revenue in the long run.

"The goal of tax policy should be to maximize economic growth," says Gerald Scully, senior fellow with the NCPA and author of the study. "Tax policies that maximize growth would satisfy the stated goals of policy makers on both the right and the left."

Some activities of government contribute to economic growth. Yet when government becomes too large, it slows economic growth. The trick for policy makers is to find the point at which economic resources are allocated most productively between public and private uses. At this level of taxing and spending, the economy will grow at the fastest sustainable rate. According to the study:

-- To maximize economic growth, federal, state and local taxes combined should average about 23 percent of gross domestic product (GDP).

-- However, tax revenues as a share of GDP have not been at that level since 1950 and for years have averaged between 30 and 34 percent.

Would Americans have had to sacrifice important government programs to keep the overall tax rate down? Not at all, according to the study. At a lower rate of taxation, higher growth would have produced more government revenue than the amount the government actually collected. For example, between 1950 and 2004:

-- Had the combined tax rate been held to the optimum 23 percent, the economy would have grown at a clip of 5.8 percent per year, rather than the 3.5 percent that actually occurred.

-- As a result, real GDP would have been $37 trillion by 2004, more than three times greater than it was.

-- The average American family would have more than three times as much real income today than it actually has.

-- Government at all levels would have collected $61.9 trillion more in taxes.

"If we had just kept the tax burden at its optimum level, we would have had enough money to have funded all actual spending programs during that time without any public debt," says Scully. "If our concern is long-term economic health and equality, we need to think about policies that maximize growth."

The NCPA is a nonprofit, nonpartisan research institute with offices in Dallas and Washington, DC that advocates private solutions to public policy problems. It depends on the contributions of individuals, corporations and foundations that share our mission. The NCPA accepts no government grants.





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