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2006: A look back - A look ahead  
  Taxpayers cleaned up with new credits last year, but be forewarned: Big Brother will be looking more closely in 2007.
 Personal finance calendar  Personal finance calendar 

Taxes 2007: Good planning can reduce tax bill

The surest way to tax savings is through tax planning, but you don't necessarily have to hire a financial adviser as a guide. There are several steps you can take yourself to reduce your tax bill:

Think about retirement
Today's contributions to retirement accounts will definitely mean more comfortable tomorrows down the road. Even better: Putting money into such accounts also can help reduce your current tax bill.

Thanks to new pension laws, you have more retirement options.

Start at the office. If you have a 401(k) check with your payroll office about when and how you can boost your contributions. Many companies allow you to easily change the percentage of your pay that you have automatically deposited into your company plan. Adding a bit more before Dec. 31 will reduce your 2006 taxable income amount.

If you're not yet participating, find out when you can enroll. Companies have an open season, typically in the fall, when workers can sign up for this benefit. If you have a major life event, such as a marriage, divorce or birth of a child, you can make 401(k) changes then to accommodate those changes.

For 2006, federal law allows you to contribute up to $15,000 to a 401(k), $20,000 if you're age 50 or older. Those same amounts are the starting point for 2007 but will be adjusted upward slightly to account for inflation. The IRS will announce next year's specific limits in late 2006.

Even if you have a 401(k) at work, consider opening an IRA or contributing to an existing account. Your choice of a traditional IRA or a Roth account depends upon your individual financial situation. In some cases, contributions to a traditional account are deductible from current taxes; with a Roth, you'll get to eventually withdraw the money tax-free.

The key to an IRA is to take full advantage of these tax-favored accounts. Sure, you can wait until the April filing deadline (the 16th in 2007, because next April 15 falls on a Sunday) to contribute to your IRA for the 2006 tax year. But the earlier you put into the account, regardless of whether it's a Roth or a regular plan, the greater the power of compound earnings.

You can save up to $4,000, or $5,000 if you're 50 or older, in either type of IRA in both 2006 and 2007.

-- Posted: Nov. 1, 2006
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