Tax time is here again. Get out your calculators, organize your receipts and take note. Here are some last-minute tips to help you minimize the pain.
The bad news is that most investors are down big this year. The good news is that you can apply up to $3,000 of your losses to offset your taxable income AND carry forward any losses in excess of $3,000 for future tax years. Keep in mind, if your losses are in your 401k or IRA -- you cannot claim the $3,000 loss on your tax return. The credit is only available to you if you actually sold any of your investments.
Tax Breaks for Homeowners
There are three new provisions which could translate to a savings for homeowners. As you may recall, Congress passed a housing bailout bill this past July. If you recently purchased your home-within the last year-you may be eligible for a tax credit of up to $7,500. The credit was put in place to give new homeowners an extra helping hand with their mortgage.
Second, there is a new tax break for homeowners who do not itemize their taxes. This year, for the first time, individuals may claim a property tax deduction of up to $1,000 on top of their standard deduction.
Finally, for homeowners who have unfortunately had the balance of their mortgage reduced because of foreclosure or restructuring, will not have to pay any tax on the difference. In the past, any reduction would have been considered taxable income and would have resulted in the homeowner paying additional money to the IRS. All of these new provisions could not come at a better time for homeowners.
If you itemize your tax returns, today is an excellent time to pay your January 2008 mortgage payment. If you pay your mortgage by Dec. 31, you are able to deduct the interest this year. For example, let's assume you have a $150,000 mortgage at a 6 percent rate and pay $750 every month (in interest alone); you could save over $187 in 2007 by paying your mortgage now (assuming a 25 percent tax bracket). Simply stated, by paying your mortgage in advance, you are able to put the monthly interest payment directly toward your tax bill for 2007.
Studies show that about 50 percent of people cash out their retirement savings plans, like their 401k, when they switch or lose their job. If you are under the age of 59 ½, you will have to pay income taxes on the money as well as a 10 percent penalty. The math on this is pretty staggering. Assume you have $5,000 invested in a 401(k) and cashed out the money, after paying the 10 percent early withdrawal fee AND federal and state income taxes, you would be left with about $2,900.
Instead of cashing out, roll your money over to an IRA or keep it with your former employer. Most employers will allow you to keep the money invested as long as your balance is over $1,000. If you left the same $5,000 in your employer's 401(k) or rolled it over to an IRA, you would have more than $34,000 for retirement assuming an 8 percent annual return for the next 25 years.
I always like to tell people to think of Dec. 31 as if it is April 15. Now is the time to gather all of your receipts and documents necessary to file on time. Keep in mind; while there is a penalty for filing late, there is no penalty for being prepared and filing early. Some of the most common last minute snafus can be avoided such as a missing social security number-not just for you, but for your dependents. Without a social security number, the IRS can hold back your refund or even prevent you from taking any number of credits.
If you have been contributing to a flexible spending account (FSA) at work, be sure to use all of the money you have deferred. FSAs permit employees to contribute pre-tax dollars to an account established specifically to pay for medical and childcare expenses. Covered expenses include eyeglasses, birth control, dental work (not including cosmetic), co-payments for prescription drugs and doctors' visits, as well as many over-the-counter medicines, such as antacids, allergy medicine, cold medicine and pain relievers. The upside of FSAs is that by contributing pre-tax dollars, you lower the amount you pay on income taxes, but the downside is that you have to use all of the money you have deferred during the year by Dec. 31 or you lose it. However, there are some exceptions-so check with your employer to see if you can extend your date.
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