KIPLINGER TAX CENTER
TRUSTED ADVICE TO HELP YOU LOWER YOUR 2007 TAX BILL
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Single taxpayers should plan these moves throughout the year to reduce taxable income and increase tax deductions. Here are the areas where you should look for tax savings:
At work
Car and home
College and other expenses
Family planning
Inheritance
Retirement savings
AT WORK
Give yourself a raise. The odds are high that you're having too much tax taken out of your paycheck every payday. The evidence is clear if you have a big refund coming. About 90 million of the returns filed in 2006 called for refunds averaging more $2,200. Filing a new W-4 form with your employer (get one from your payroll office) will insure that you get more of your money when you earn it. See our easy-to-use withholding calculator to help you figure how many allowances you should claim. Suggest that your husband or wife do the same. This correction could save you $200 a month.
Switch to a Roth 401(K). If your employer offers the new breed of 401(k), seriously consider opting for it. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth, but younger workers are often in lower tax brackets ... so the break isn't so impressive anyway. Also unlike a regular 401(k), money coming out of a Roth 401(k) in retirement will be tax-free ... at a time you may well be in a higher bracket. More on the Roth 401(k).
Be smart if you're a teacher or aide. Keep receipts for what you spend out of pocket for books, supplies and other classroom materials. You can deduct up to $250 of such out-of-pocket expenses ... even if you don't itemize.
Track costs of a job-related move. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move ... even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. If you move after getting married because either you or your new spouse has a job at the new location, you can deduct the cost of moving yourselves and your belongings, including 20 cents a mile for driving your car (in 2007).
Tally job-hunting expenses. As long as you're looking for a new position in the same line of work, you can deduct job-hunting costs, including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income. More on Miscellaneous Deductions.
Take advantage of your flex account. Be aggressive if your employer offers a medical reimbursement account -- sometimes called a flex plan. It lets you divert part of your salary to an account, which you then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money -- and that can save you 20% to 35% or more compared with spending after-tax money.
Pay tax sooner than later on restricted stock. If you receive restricted stock as a fringe benefit, consider making what's called an 83(b) election. That lets you pay tax immediately on the value of the stock rather than waiting until the restrictions disappear when the stock "vests." Why pay tax sooner rather than later? Because you pay tax on the value at the time you get the stock, which could be far less than the value at the time it vests. Tax on any appreciation that occurs in between then qualifies for favorable capital gains treatment. Don't dally: You only have 30 days after receiving the stock to make the election.
Pay back a 401(k) loan before leaving a job. Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you're younger than 55, hit with a 10% penalty, too.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of an educational assistance tax free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job related and even graduate-level courses qualify.
CAR AND HOME
Save that receipt. Be sure to hold onto the paperwork if you bought a new car in 2007. The law now allows taxpayers who itemize deductions to choose between deducting state income taxes or state sales taxes. (This law has not yet been renewed for 2008.) If you write off sales taxes, you can add the amount paid on your car to the amount the IRS sets for taxpayers with your income.
Buy a hybrid, take Uncle Sam for a ride. You can drive away with a tax credit if buy a gasoline/electric hybrid by December 31, 2010. The size of the credit depends on how fuel-stingy your new car is, but the tax savings can range from several hundred up to $3,400.
Use a Roth to save for your first home. Sure, the "R" in IRA stands for retirement, but a Roth IRA can be a powerful tool when you're saving for your first home. All contributions can come out of a Roth at any time, tax and penalty free. And, after the account has been opened for five years, up to $10,000 of earnings can be withdrawn tax and penalty free for the purchase of your first home. Assume $4,000 goes into a Roth each year for five years, and the account earns an average of 8% a year. At the end of five years, the Roth would hold about $25,350 -- all of which could be withdrawn tax and penalty free for a down payment.
COLLEGE AND OTHER EXPENSES
Let Uncle Sam pay part of your education expenses. If you're paying your own tuition for a graduate course or other training, you may qualify for a Lifetime Learning Credit that's worth 20% of up to $10,000 of qualifying expenses. That could knock as much as $2,000 of your 2007 tax bill. This tax break phases out once modified adjusted gross income exceeds $57,000 for singles and $114,000 for married couples filing jointly.
Deduct expenses even if you don't itemize. Taxpayers who claim the standard deduction often complain that itemizers get the better deal. But that's not true. The only reason to use the no-questions-asked standard deduction is if it's bigger than the total you could deduct if you itemized. And, you can deduct a lot of things even if you don't itemize, including student loan interest, job-related moving expenses, costs incurred by reservists and performing artists, and contributions to health savings accounts and IRAs. Keeping good records will save you money.
FAMILY PLANNING
Deduct interest paid by Mom and Dad. Until recently, parents had a good reason not to help their children pay off student loans. If the parents were not liable for the debt, then no one got to deduct the interest. Now, however, when parents pay, it's treated as if they gave the money to the real debtor, who then paid off the loan. The child gets the tax deduction, as long as the parents can't claim him or her as a dependent, even if he or she doesn't itemize.
Time your wedding. If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a "marriage penalty" that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony.
Marry your withholding, too. Tying the knot means a lot to your Uncle Sam, too. Before the wedding, soon-to-be husband and soon-to-be wife should get a W-4 form and figure how to arrange withholding from your paychecks to match your new tax status.
INHERITANCE
Roll over an inherited 401(K). If you are named a beneficiary of a 401(k) plan, take advantage of a new rule that arrived in 2007. For the first time, non-spouses can roll over the account into an IRA and stretch payouts (and the tax bill on them) over your lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years or fewer.
INVESTMENTS AND RETIREMENT SAVINGS
Check the calendar before you sell. You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The "holding period" starts on the day after you buy a stock, mutual fund or other asset and ends on the day you sell it.
Don't buy a tax bill. Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout, and you'll get a lower price, and no tax bill.
Make your IRA contributions sooner rather than later. The sooner your money is in the account, the sooner it begins to earn tax-deferred or, if you use a Roth IRA, tax-free returns. Over a long career, this can make an enormous difference.
See All Tax Savings Strategies
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