Early Tax Season Preparation

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April 15 may be months away, but you only have until Dec. 31 to ease your tax burden in a big way.

Sure, some tax-planning techniques are available until you file your return in April, but most expire at the end of this year. So, don't delay taking these steps.

1. Boost Your Wealth Potential Don't neglect this. Put money into your employer retirement plan (401(k)s, 403(b)s and the federal government's Thrift Savings Plan) to potentially reduce your taxable income.

2. Beware the Alternative Every year, more Americans are hit by the Alternative Minimum Tax. Think of it as a parallel tax system with different rules for deductions and exemptions. Use the Internal Revenue Service's AMT Assistant to see if you'll get snared by this tax.

3. Don't Get Trapped Avoid buying a bunch of mutual fund shares in non-IRA accounts shortly before the fund's distribution date. Why? Most funds hold onto dividends and capital gains during the year and hand them out in December. If you buy just before the distribution, you'll end up paying taxes on gains you didn't participate in. In other words, just because there were gains within the fund before you got in doesn't mean you're exempt from paying taxes on those gains.

4. Know Your Limits Many tax deductions and credits phase out when your adjusted gross income exceeds certain levels. Before counting on these tax benefits, learn the limits by checking the IRS Web site or talking to a tax advisor:

  • Child Tax Credit
  • Hope and Lifetime Learning Credits
  • Student Loan Interest
  • College Tuition
  • Earned Income Credit
  • Deductible Medical Expenses
  • Miscellaneous Itemized Deductions

5. Take Your Losses Now's a good time to consider selling investments you're holding at a loss. Taking these losses may reduce the taxes you owe on investment gains. If you don't have gains, your investment losses can offset up to $3,000 in ordinary income.

6. Pay It Forward If you pay your property taxes by Dec. 31, you can take a bigger deduction on your tax return. And if you make your January mortgage payment before the year ends, you get to deduct the interest on your tax return too.

7. Give and Receive Have you given money to charity this year? Make sure you have receipts or canceled checks as proof so you can deduct the total from your taxes. And consider pre-donating; making planned charity contributions in December. The charity will welcome earlier use of your money, and you'll have a larger deduction this year.

Older than 70  If you're 70 years or older before Dec. 31, 2007, presents a one-time tax-planning gem: This is the last time you can direct up to $100,000 from your IRA and give it to a qualified charity, without paying taxes on the gift. You can't deduct the sum on your 2007 tax return, but it will come out of your IRA completely tax-free. Your donation will also satisfy your required minimum distribution for the year.   

Joseph Montanaro is a salaried CERTIFIED FINANCIAL PLANNER practitioner with USAA Financial Planning Services, one of the USAA family of companies.  Montanaro is a lieutenant colonel in the U.S. Army Reserves and served six years on active duty following graduation from West Point. USAA is a diversified insurance and financial services organization that has served the military community since 1922. 

Financial advice provided by Financial Advice Center as a service of USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), and USAA Financial Advisors, Inc., a registered broker dealer.

About USAA USAA, a diversified financial services company, is the leading provider of competitively priced financial planning, insurance, investments, and banking products to members of the U.S. military and their families. Named by BusinessWeek in its March 5, 2007 issue as  Customer Service Champion and recently ranked highest among financial services companies for customer advocacy in a Forrester Research survey, USAA provides convenient and accessible financial products to its more than 6 million members. For more information about USAA, or to learn more about membership, visit usaa.com.

Financial planning services provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency.


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