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 on the sale. In fact, you’ll have a $300 capital loss that can offset the tax on other capital gains. - Check your checkbook for healthcare costs
Medical expenses are deductible to the extent they exceed 7.5% of your AGI. If your AGI for 2007 was $100,000, for example, and unreimbursed medical expenses were $8,000, the 7.5% threshold is $7,500, and you can deduct the excess $500. “You may be able to take larger deductions if you’ve paid medical bills for an aging parent, grandparent, aunt, or uncle,” says Benjamin Bohlmann, partner at Miami-based accounting firm Mallah Furman. Those medical bills could include payments to a nursing home or an assisted living facility. Get a statement showing how much of the costs were medical-related. If you paid $20,000 for assisted living, for example, and 30% was attributable to medical services, then that would be a $6,000 medical expense. “For those payments to qualify as your medical expenses, you must provide more than half of what it costs for that person to live during the year,” says Bohlmann. - Check your charitable contributions
“Go through your records and check your calendar to determine what goods you donated to charity for events such as church fund-raisers,” says Genevia Gee Fulbright, a CPA in Durham, North Carolina. You can estimate the value and take it as a charitable deduction. Any driving you did last year for nonprofit and church groups is also deductible, at 14 cents a mile. “Review the statement received from your main church, for donations,” says Fulbright. If you did not receive statements from churches you visited throughout the year, make sure that you pull together your checks to show how much you donated.
Also bear in mind that if you request an automatic six-month filing extension, you’ll have until Oct. 15, 2008 to cut your taxes for 2007.