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 The best approach to tax planning is to start early in the year. But it's never too late - even as the April tax filing deadline approaches - for some last minute tax savings tips. After all, our obligation is to pay our fair share of income taxes, and not a dollar more.
Retirement Savings Tax Breaks
If you're eligible, you can still contribute to an individual retirement account. In fact, this is perhaps the only account you can open after the New Year and still claim on a prior year's federal income tax form. In other words, if you decide you want to fund an IRA in 2007, you have until the April 2008 deadline to open that account and still claim this on your 2007 tax return.
Keep in mind that Roth IRA contributions are not tax deductible; however, traditional IRA contributions may be deductible depending on your AGI and whether or not you're already covered by an employer's pension plan.
Child and Education Tax Credits
Child tax credits and education credits have been more generous in recent years. That means more tax-savings opportunities for parents of children - especially those with dependents attending a college or university.
Child Tax Credit
The Child Tax Credit allows you to reduce the federal income tax you owe by up to $1,000 for each qualifying child under age 17. To qualify, for this tax credit the child must be:
- Claimed as your dependent
- Under age 17 at the end of the year
- A son, daughter, adopted child, grandchild, stepchild or eligible foster child, your sibling, stepsibling, or their descendant
- A U.S. citizen or resident alien
The child tax credit is phase out beginning at $110,000 for married filing jointly, $55,000 for married filing separately $55,000 and all others at $75,000.
Dependent Care Credit
If you're a working parent and paying for the care of a dependent under the age of 13, then you may be eligible for the dependent care tax credit for all qualifying expenses. In 2007, the maximum credit you can take is between 20 to 35% of qualifying expenses with a deduction cap of $3,000 for one child and $6,000 for two children.
Tuition Deductions
In the 2007 tax year, you can deduct up to $4,000 for higher education tuition and qualifying fees. This deduction is phased out starting at $80,000 for single filers and $160,000 for joint filers.
Student Loan Interest
In 2007, taxpayers that qualify can deduct up to $2,500 in student loan interest, regardless of whether they itemize their taxes. This deduction is phased-out starting at $70,000 for single filers and $140,000 for joint filers.
Education Tax Credits
There are two additional education tax credits that can help you lower your tax bill. The first is the Hope Credit, which is worth up to $1,500 for each qualifying student. The Hope Credit is available during the first two years of college. The credit is structured as 100% of the first $1,000 in tuition and 50% of the next $1,000 - a total of a $1,500 tax reduction.
The Lifetime Learning Credit is the second credit, which you can claim after you've finished with the Hope Credit. You may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the Lifetime Learning Credit can be claimed for each student.
Business-Related Tax Savings
Even if you don't own your own business, you may still be able to deduct certain business-related expenses if you purchased something for your job and were not reimbursed by your employer. For example, job related travel is deductible on your income taxes. Make sure you save all your receipts as proof of these expenses.
If you changed jobs you may have paid too much Social Security tax. If you paid too much, you can get it back with a tax credit against your income tax liability.
Charitable Donations
Tax deductible charitable donations can be in other forms besides checks or cash. If you donate a car, clothing, shoes, furniture, or other items of value to a recognized charity, get a receipt. You can use the receipt as proof for a deduction on your taxes. The mileage driven for charity is also tax deductible. In 2007, the rules for gifts to charity were made more stringent, so make sure you know all the requirements before taking a deduction.
Last Minute Tax Deduction Check List
Finally, here is our tax deduction checklist, which summarizes the types of federal income tax savings you should be looking for when preparing your taxes:
Note: Some of the above items are deductible as miscellaneous itemized deductions and as such are deductible to the extent they exceed 2% of you AGI. In the case of medical and dental expenses, they are deductible to the extent they exceed 7.5% of your AGI.
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