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Tax Tips for 2007–08

Here are some helpful tax tips for 2007–08 to get a jump on filing your taxes long before the April deadline.

Tax Papers, The Attorney Store
  • Get started now. Use last year’s tax return as your starting point.
  • Earlier is better when it comes to working on your taxes. Taxpayers are encouraged to get a head start on tax preparation, especially since early filers avoid the last-minute rush and receive their refunds sooner. If you owe money, go ahead and wait—there are no discounts for early pay.
  • Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files.
  • Get the right forms. They’re available around the clock on the IRS Web site and at The Attorney Store.
  • Take your time to avoid mistakes. Most mistakes include skipping lines, adding/subtracting and failing to sign a form. Always double-check your Social Security number.
  • E-filing is easy, catches math errors, provides confirmation that your return has been received and helps you get a faster refund.
  • Don’t panic. If you have a problem or question, try the IRS customer service number at 800-829-1040.

You must file a tax return if your income is above a certain level. The level varies depending on filing status, age and type of income.

For example, a married couple both under the age of 65 generally are not required to file until their joint income reaches $17,500. However, self-employed people generally must file a tax return if their net income from self employment was at least $400.

Even if you do not have to file, you should file to get money back if federal income tax was withheld from your pay or you qualify for a refundable credit that may give you a refund even if you do not owe any tax.

Refundable credits include:

  • Earned Income Tax Credit: a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes and may be returned in the form of a refund.
  • Additional Child Tax Credit: may be available if you have at least one qualifying child and did not use the full amount of your Child Tax Credit.
  • Health Coverage Tax Credit: limited to individuals who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation.

The IRS Web site is IRS.gov. Don’t be confused by Web sites that end in .com, .net, .org or other designations. Protect yourself and your identity.

Your federal tax filing status is based on your marital and family situation. Your marital status on the last day of the year determines your status for the entire year. If more than one filing status applies to you, you can choose the one that gives you the lowest tax obligation.

There are five filing status options:

  • Single: Generally, if you are unmarried, divorced or legally separated according to your state law, your filing status is single.
  • Married Filing Jointly: If you are married, you and your spouse can file a joint return. If your spouse died during the year and you did not remarry, you can still file a joint return with that spouse for the year of death.
  • Married Filing Separately: Married taxpayers can elect to file separate returns.
  • Head of Household: You generally must be unmarried and have paid more than half the cost of maintaining a home for you and a qualifying person.
  • Qualifying Widow(er) with Dependent Child: If your spouse died during 2005 or 2006, you have a qualifying child and you meet certain other conditions, you may be able to choose this filing status.

Tax Concerns

Are you concerned that your efforts to get ready early could be affected by the Alternative Minimum Tax legislation passed by Congress in December? Most individuals will not be affected, so it is still a good idea to get an early start on your preparations. Even if you are filing one of five forms affected by the recent legislation, the IRS expects to be ready for your return by Feb. 11.

If you used any proceeds of refinancing for something other than physical improvements to your home, that amount may be subject to the Alternative Minimum Tax (AMT). On the other hand, remember that points paid in a prior refinancing that you have not already claimed can be deducted in the year you refinanced again.

You can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income ($1,500 for married couples filing separately). Look in your taxable accounts for investments with relatively large losses where you don’t expect a comeback. Remember, any losses you can’t use to offset gains this year can be carried over into future tax years. One word of caution: Watch out for the so-called wash sale rule, which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days.

Tax Suggestions and Comments

If you’re self-employed, consider a small business retirement account, such as a SEP-IRA, SIMPLE IRA, Individual 401(k) or other qualified retirement plan. Contributions are tax-deductible and grow tax-deferred. If you opened a qualified retirement account by December 31, you have until the day you file next year, including extensions, to make this year’s contribution.

Be sure to make your annual IRA contribution. Even though you have until next April 15 to make your tax-year contribution, sooner is better because your money will have more time to benefit from potential long-term compound growth. Consider a Roth IRA if you’re eligible, especially if you're not eligible for a deductible traditional IRA contribution. If you’re not eligible for a Roth today, you might want to make a nondeductible contribution to a traditional IRA anyway, as recently passed tax legislation allows anyone to convert to a Roth IRA starting in 2010 without any income restrictions, though you’ll still have to pay taxes on the earnings.

Coverdell Education Savings Accounts. If you’re eligible, you can contribute up to $2,000 to a Coverdell account on behalf of a child. Contributions grow tax-free, and qualified K–12 and higher-education–related withdrawals are tax-free. You have until next April 15, but if you make the contribution by December 31, it will count as a gift for this year instead of next year.

Giving Act before year-end

You can give up to $12,000 each to as many individuals as you wish this year and pay no gift tax. Spouses can ''split'' gifts for a total of $24,000 per beneficiary per year. Gifts beyond that are taxable but only to the extent they exceed $1 million over a donor’s life. The lucky recipient of the gift owes no gift or income tax and doesn’t even have to report the gift unless it comes from outside the U.S.

You can also make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your $1 million lifetime gift tax exemption.

  • Shift income to tax-advantaged children. Consider gifting appreciated securities and stocks whose dividends are taxed at low long-term capital gains rates to children age 18 or older because they pay tax at their own rate—likely 5% (and headed to 0% in 2008–2010 before expiring in 2011).
  • Give appreciated securities to charities by year-end. Consider donating appreciated securities you’ve held for more than a year for a full fair-market-value deduction and no capital gains tax. If you give to a donor-advised fund by December 31, you get the tax break this year and can take your time deciding how best to distribute your gift.
  • Donate from your IRA. If you’re at least 70½ years of age, you can donate up to $100,000 from your IRA directly to charity income-tax-free for 2007. That’s likely better than taking a taxable distribution and deduction.

Additional Tax Tips

Claim your telephone excise tax refund. If you’ve had phone service since 2003, you can claim a standard refund of either $30 or $60 (depending on the exemptions you claim). If you saved your phone records, you may be able to claim even more! The IRS says that 30% of those filing returns are forgetting to claim this.

Take advantage of the Free File program. The IRS reports that 70% of taxpayers qualify for free electronic tax filing. If your 2006 adjusted gross income was $52,000 or less, you qualify for free filing.

Special Tax News

The upcoming tax season is expected to start on time for everyone except for certain taxpayers potentially affected by late enactment of the AMT ''patch.'' Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the AMT legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law.

The IRS has targeted Feb. 11 as the potential starting date for taxpayers to begin submitting the five related returns affected by the legislation. The date allows the IRS enough time to update and test its systems to accommodate the changes without major disruptions to other operations related to the tax season.

The AMT came into being with the Tax Reform Act of 1969. Its purpose was to target a small number of high-income taxpayers who could claim so many deductions that they owed little or no income tax. A growing number of middle-income taxpayers are discovering they are subject to the AMT.

''I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money.''
entertainer Arthur Godfrey


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