Year-end moves to trim your '07 tax bill

By Jeff Schnepper

Yes, it's November. And the holidays are nearly here. My gift to readers is a gentle reminder to make those last-minute tax moves.

I say this every year. Your tax planning for your 2007 return should have started last December. It's more complicated this year because tax laws have changed again. They always do.

Still, there are moves you can and should make before Dec. 31 to trim your 2007 tax bill.

Let's start with the simple things.

The easy stuff

Charitable donations. If you contribute to your church, your college, the local dog pound, United Way or organizations contributing to disaster relief, make these donations before Dec. 31. And make sure, before you file your tax return, you have a receipt from the organizations that benefited from your generosity.

If you don't have the cash, find out if the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it's valid as a 2007 deduction.

• Discuss with Jeff Schnepper: What money moves are you considering by year's end?

Separately, any contributions of clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, an appraisal is now required. The Internal Revenue Service can deny a deduction for items of minimal value.

Complicating any deductions will be new requirements on record keeping. This is important.

To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.

Your flexible spending account (FSA). This isn't exactly a tax savings, but if you don't use the dollars you contribute to a flex plan, you lose them.

The IRS allows purchases made up through March 15, 2008, to count. Your employer can give you a debit card for your FSA spending. You can even pay for nonprescription drugs through an FSA. That eliminates a whole lot of paperwork.

• Video: Top retirement savings mistakes

Be careful, however. The IRS may allow the extended March 15 date, but, unless your employer's plan is amended to allow it, you won't qualify.

Mortgage interest. Make your Jan. 1, 2008, mortgage payment on Dec. 31, 2007. Remember to add the extra interest paid to what your bank reports on its Form 1098. It'll get your payment in 2008 and won't report it for 2007. But, you paid it then, and it adds to your deduction this year. (The downside is that you won't be able to deduct the payment from your 2008 return.)

Real-estate taxes. If you pay your own real-estate taxes, make any payments due in the beginning of 2008 by Dec. 31. My fourth-quarter real-estate tax is due on Feb. 1, 2008. By paying on Dec. 31, I get the deduction a year earlier. (Again, you can't deduct payments made in 2007 from your 2008 return.)

A friendly warning: Taxes aren't allowed as a deduction under the alternative-minimum-tax computation. If you think you will be hit by the AMT, don't prepay.

Medical and miscellaneous deductions. Medical expenses and miscellaneous itemized deductions have "floors." For medical expenses, only those in excess of 7.5% of your adjusted gross income (AGI) count. Miscellaneous itemized expenses have to exceed 2% of your AGI to qualify.

An important point: Your health insurance premiums count so long as you're not paying them out of a flexible spending account.

If you're going to exceed the floor, accelerate your expenses. Prepay your orthodontist or your tax preparer. Mail your checks on or before Dec. 31. Alternatively, if you're not going to exceed your floors, defer the deductions to 2008. You may exceed your floors then.

Continued: Contributions, gifts, gains and losses

 1 | 2 | next >