I know, I know. It’s August. Tax season is eons away. You don’t want to think about it.
But maybe you should. With some shrewd planning now, you can save thousands on your taxes come April. Consider these actions:
1. Refinance. Yes, the market is a mess right now. But there are still lenders willing to offer credit to homeowners so long as you qualify. And the interest on home mortgages is deductible. So, don’t run up your credit cards – that interest isn’t deductible (and don’t even get me started on the interest rates). Instead, consider refinancing.
2. Ask your employer about a health savings account (HSA). If you don’t purchase your own health insurance, chances are you don’t generally qualify for medical deductions. That’s because if you itemize (and only if you itemize), you are limited to deduct the amount by which your total medical care expenses exceed 7.5% of your adjusted gross income (AGI). Confused? Here’s an example. Say your AGI is $50,000 and your medical expenses are $5,000 for the year. Under the IRS formula, 7.5% of your AGI is $3,750. Even though your medical expenses were $5,000, you can only deduct $1,250 (medical expenses less 7.5% of your AGI). And if your expenses are less than $3,750, you get no deduction at all. Stinks, huh? But if your employer establishes an HSA, you can pay medical expenses out of pre-tax dollars that you contribute ahead of time. There are limits on your contributions (for 2007: $2,850 individual and $5,650 family) but in most cases, you still come out ahead.
3. Contribute to a 529 savings plan. In addition to the future tax savings for your children, many states (like Pennsylvania) offer a state income tax deduction if you contribute to a plan in that state. The best part? You don’t have to be the parent! Grandparents, aunts, uncles, and friends are eligible to make contributions, too.
4. Top up your IRA. Deductions to individual retirement accounts (IRAs) are deductible above the line which means that you don’t have to itemize to take advantage of this strategy. And don’t forget your spouse: you can establish a spousal IRA even if your spouse doesn’t work. Check with your tax professional for information about limits and IRA options.
5. Do something good. In other words, make a donation. In order to take a charitable deduction donation for 2007, the donation must be made before December 31. But it seems that nobody has cash at the end of December. So, if you have a few dollars in your pocket now, think about giving them to the qualified charity of your choice. Be sure and get a receipt!
6. Buy a hybrid car. If you’re in the market for a new car, do it now. Manufacturers have sales limits that influence your donations – and the more popular cars are going fast. So, if you want to take advantage of the hybrid credit – which can be significant – don’t wait until it’s too late!
7. Improve your home. In addition to the increase in mortgage interest deduction, if you finance the improvements via a home equity loan or refinance, there are additional tax credits for making energy-efficient improvements. New windows and appliances in your home now could mean more money in your pocket come tax time.
I’m as big a procrastinator as anyone, but there are some instances when it really does pay to plan. Give one or two a whirl – you’ll be glad come April that you did.
