ORGANIZE YOUR TAX INFORMATION
Whether you're doing your own taxes or working with a tax preparer, make sure you have all the documents you need. You've probably been receiving a variety of tax information over the past couple of months. If, like many people, you've put it aside to look at later, don't delay any longer.
By taking inventory of your documents now, you'll have more time to follow up with information providers in case some records are missing.
Here are some things to look for:
- Do you have all your charitable receipts?
- How about Form 1098 showing how much mortgage interest you paid?
- Does the year-to-date information on your year-end pay stub match your W-2?
If you find any errors, you'll appreciate having the time you need to correct them.
CONSIDER PERSONAL CHANGES THAT OCCURRED IN '07
There's nothing more constant than change. Chances are you probably had some changes in your life last year that might affect your tax situation. For instance, did you refinance or sell a home? Do you have a new job? Did you exercise stock options or take significant capital gains? These events can impact your tax situation considerably.
How about changes in your family such as a marriage, divorce, or a new baby? Remember, you have to provide a Social Security number on your return for all your dependent children, even infants. Best to request a number from the Social Security Administration right away. On the flip side, a child who can no longer be claimed as a dependent can affect your taxes as well.
MAKE YOUR IRA CONTRIBUTIONS
You have until the April deadline to make last year's IRA contribution, but why wait? Preparing now will let you know how much you can provide and whether the contribution is deductible. If you haven't opened an IRA yet, you can take this time to consider whether a traditional or Roth IRA makes sense for you.
You also have until April to make last year's contribution to a Coverdell Education Savings Account if you're eligible. Just make sure to tell your account provider that the contribution is for 2007.
REVIEW EXEMPTIONS, DEDUCTIONS AND CREDITS
When it comes to money, it's not how much you make that's important, it's how much you keep. Be sure you're using all the exemptions, deductions and credits that are available to you.
For instance, on top of the personal exemptions and standard deductions, there's a residential property energy credit for installing qualified energy-saving items in your primary residence. There's also a credit available for installing special solar or fuel-cell equipment.
If you have a dependent under age 17, you might qualify for a Child Tax Credit of up to $1,000 depending on your income. Plus, if you have dependents under age 13 or other dependents like a parent or spouse who can't take care of themselves, you can take advantage of the Child and Dependent Care Credit for certain qualified expenses such as day care, housekeeping and baby-sitting.
And don't forget the use of your car. There are different standard mileage rates for business use, charitable use, and medical and moving travel. You're driving the miles and buying the gas anyway, so why not get the deductions if you qualify?
FILE EARLY
If you're due a refund, you'll want to file early. But you won't know for sure until you run the numbers, so it pays to get started now. Along with the tax return package and instructions you receive from the IRS in the mail, you might want to check out IRS Publication 17: Your Federal Income Tax before you begin.
If you're an investor, you'll find Publication 550: Investment Income and Expenses full of information on everything from how to report interest, dividends and capital gains to which investment-related expenses are deductible for income tax purposes. These and several other pertinent publications are available online at www.irs.gov. Even if you don't prepare your own taxes, this is valuable knowledge.
Once you know your tax status, you can use e-filing and direct deposit to receive a refund quickly. If it turns out you owe a little, you can always hold off paying until April 15.
GET A JUMP ON '08.
As you're preparing your '07 return, you might want to begin thinking about '08. There are certain tax changes that could affect your financial decisions this year. For instance, the personal exemptions and standard deductions have gone up for 2008, as have IRA contribution limits. At the same time, the wage base limit for Social Security withholding has also increased. You can receive the latest facts and figures at www.irs.gov. Or talk to your tax adviser.
Getting a jump-start on your '08 tax planning can help you decide if you need to change your withholding, when to make your IRA contributions, and how tax-smart investing can help you keep more of your money. Thinking about these items now will make tax time next year even easier.
Personally, I love spring. But I enjoy it even more if I don't have to think about taxes.
Therefore, I try to take my own advice and get the tax preparation done while it's still a bit rainy and gloomy outside. If you do too, come April 15 you won't be running to the post office; you'll be sitting back and smelling the flowers.
Carrie Schwab Pomerantz is chief strategist, Consumer Education, Charles Schwab & Co. Inc. You can e-mail Carrie at askcarrie@schwab.com.
