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How would you like to cut your taxes and save some big bucks next year? You can.
But the key is to act now before numerous planning opportunities disappear -- some of them forever. Whether you are a salaried worker or self-employed, an active investor or retiree, here are ten steps you can take before the end of the year to lower your tax bill next spring.
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1. Max out your retirement savings. If you haven't stashed the maximum $15,500 in your 401(k) or similar workplace-based retirement plan, you still have time to earmark extra contributions from you final few paychecks or year-end bonus.
Not only will the extra money help you build a bigger nest egg, but also it will reduce your 2007 tax bill because 401(k) contributions are not counted in your adjusted gross income. Workers 50 and older -- even if you turn 50 on December 31 -- can contribute an extra $5,000 in "catch-up" contributions, for a total of $20,500. The same maximum contribution limits apply for 2008.
If you're self-employed, you can shelter even more income in a tax-deferred retirement plan. You can contribute up to $15,500 of your salary plus up to 20% of your self-employment income to a solo 401(k,) for a combined total of $45,000. If you are 50 or older, you can add an extra $5,000.
Although you have to set up your solo 401(k) plan and contribute your employee share of retirement savings by December 31, you don't have to fund the employer portion of your contributions until you file your 2007 taxes, including extensions, which can be as late as October 15, 2008. For more, see Do-It-Yourself Retirement Plans.
2. Clean out your flex account. It's smart to set aside pre-tax dollars to pay your out-of-pocket medical costs, but don't let unspent dollars go to waste. Check with your company to see if it uses the old December 31 deadline for the use-it-or-lose-it penalty provision or whether it has adopted a grace period that lets you spend 2007 flex dollars until March 15, 2008. There are plenty of ways to use your remaining funds, including dental check-ups, eye exams, glasses, contacts and prescription or over-the-counter drugs.
And use this year's health-care spending as a guide for selecting your flexible spending account contributions for next year. Don't forget to factor in any anticipated changes, such as the birth of a child or braces for one of your kids. The IRS says you can use flexible spending account dollars to pre-pay orthodontia bills even if treatment stretches into the following year.
3. Review your health care options. Open enrollment season is the perfect time to review your company health insurance. The program you selected last year may no longer be the best choice if premiums have increased or your family situation has changed (see Check Your Health Coverage). And you may be able to save money by participating in new work-based wellness programs or coordinating family coverage with your spouse's company benefits.
4. Evaluate your investments. Despite recent market volatility, mutual funds are expected to post record returns this year -- and that means higher tax bills for mutual fund investors. Now is a good time to review your entire portfolio and consider selling some of your losers.
You can use the losses in your taxable account (but not retirement accounts) to offset an equal amount of capital gains. If you have leftover losses, you can deduct up to $3,000 from your ordinary income and save any excess losses to offset taxable profits and income in future years.
5. Defer capital gains. Stock owners have more control over their taxes than mutual fund investors. If you own stock and you expect to be in one of the two lowest tax brackets next year, hold off selling any shares until next year. That's because starting in 2008, taxpayers in the 10% and 15% tax brackets will pay no tax on the profits from the sale of assets they have owned longer than one year.
