Tips to Prepare for Tax Season
It's nearing that time of year again, when most people spend more than their fair share of time pondering their relationship with the Internal Revenue Service. Here are some tips to make the filing process friendlier to both the environment and your bank accounts, as new legislation and possible tax-filing features may change the way you decide to file your return.
E-file Your Taxes This Year
Last year, 80 million taxpayers filed online. The IRS expects more to do so this year. Besides the obvious benefit to the environment, e-filing can also make your life a lot easier and your money come much quicker. According to the IRS, e-filers who choose direct deposit can receive their refund in as few as 10 days. Taxpayers can also decide to file now and have their taxes debited later, up until the April 15 deadline. Returns are more accurate as well, as additional checks are built into the software, helping to reduce the possibility of an error letter from the IRS. Those filers with an adjusted gross income of less than $54,000 can take advantage of IRS Free File.
Gather Tax Records Early
Better to get organized now than wait until the last minute, says the American Institute of Certified Public Accountants, so you don't miss out on the possibility of valuable deductions later. Organize your receipts in folders, and gather proof of donations to charity, including those given in cash. A good tip for the new year -- donate with credit cards, where receipts are recorded automatically.
Figure Out if You Are Subject to Alternative Minimum Tax
This past December, President Bush signed into law the Tax Increase Prevention Act of 2007, which increased the AMT exemption from $66,250 for married filers, and to $44,350 for unmarried filers. According to the AICPA, this act will spare 19 million individual taxpayers from being subject to the AMT this year, and also reduce the tax burden for 4.2 million who will still be forced to pay it. The AMT parallels the regular income tax, but different rates, definitions, deductions, exemptions and credits apply. Taxpayers subject to it calculate their returns with AMT and with the normal procedure, and then pay the higher amount. The highest AMT rate is 28%. The highest regular income tax rate is 35%. To determine if you are subject to AMT in 2007, go to the IRS Web site and follow the AMT instructions in the 2007 Form 1040. Because of the new legislation, the IRS says that those filers of forms related to the AMT must wait until Feb. 11 to do so.
Make Your IRA Contribution
You still have until April 15 to make your $4,000 contribution for 2007. In 2008, you'll be able to raise that contribution to $5,000, or $6,000 if you're 50 and older. Consider setting up automatic deductions in the year to come -- $416 a month will take you to the maximum.
Be Aware of Tax Issues for Seniors
Whether it's for you or your parents, realize that there are certain tax issues to be aware of, says the AARP. Depending on your income, you may be subject to taxes on your Social Security benefit, pension, annuity, IRA, or 401K. You still will have to pay property tax as long as you own your home, although many states offer "homestead exemptions" and "circuit breaker credit" for older homeowners. If you hire a caregiver for a spouse or another dependent and you are still working, you may also be able to get some tax relief therein.
Do Your Own Research
After all, you should know your financial situation better than anyone else. The AICPA suggests visiting Web sites such as 360 Financial Literacy and Feed the Pig for more information.