4 tax moves NOT to make in 2007 |
| By Kay Bell • Bankrate.com |
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Every year as the days dwindle, tax advice is offered on what moves most taxpayers should make by Dec. 31 to cut their coming
IRS bills. Bankrate does just that in "10 smart year-end tax moves ."
But just as important are tax moves that you shouldn't make now.
Here are four such instances that could provide better tax results for some taxpayers who wait until 2008.
Avoid AMT triggers
Most taxpayers by now know about the alternative minimum tax, or AMT, the parallel tax system that was created more than 30 years ago to ensure that wealthy taxpayers paid their fair share. For the last few years, however, the AMT has been snaring more middle-class filers, in large part because alternate tax system isn't indexed for inflation.
While Congress has made temporary changes to the law to address this problem, some taxpayers still find they must pay a higher AMT bill. This is usually the case for taxpayers who claim deductions that are acceptable under the regular tax system, such as state and local income taxes, as well as real estate and personal property taxes and miscellaneous write-offs, but which aren't allowed under the AMT.
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| Wait to make these tax moves
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| There are several good tax moves to make before the end of the year, but here are four strategies better left until after Jan. 1. |
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"The traditional advice is to prepay state and local taxes in December. This is not a good idea if going to be subject to the AMT," says Barbara Weltman, an attorney who also writes for J.K. Lasser's tax guides. "You don't want to be paying taxes that, under the AMT rules, you won't be able to deduct."
Congress is still debating what the 2007 limits will
be, but if you were subject to the AMT last year, live in a high-tax
state, have a lot of personal exemptions or exercised a large amount
of incentive stock options, you might get hit with the parallel
tax again on your 2007 return. In these cases, don't waste your
deductions by accelerating them into this tax year.
Don't waste deductions
Even if you're not in danger of paying the AMT, make sure you don't squander deductions. That's a distinct possibility if you don't think through your bunching strategy.
By bunching, a taxpayer pulls some deductions into the current tax year or pushes them into the next. The goal is to consolidate them in the tax year where they will exceed the standard amounts.
For 2007 taxes, that's $5,350 for single filers and married individuals filing separately; $7,850 for heads of household; and $10,700 for married couples filing jointly. In 2008, the standard deduction amounts are $5,450 for singles and married taxpayers filing separately; $8,000 for heads of household; and $10,900 for married couples filing a joint return.
"In tallying up your deductible expenses, if you come in just under that standard amount, you have to decide if you can come up with enough additional allowable expenses to push the total over the top," says Weltman.
Often, though, taxpayers don't run the numbers first; they simply take the deductions and then discover they don't have enough to itemize. Instead, says Weltman, in this last month of the year, think about whether you're going to itemize or claim the standard deduction on your 2007 return.
"Then you can decide whether to push or pull deductions that are discretionary into the tax year that will do you the most good," she says.
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