Use completed 1040 to plan for this year

first_imgNEW YORK – Right now, while the pain of filing your income taxes for 2006 is still fresh, grab that Form1040 and take a good hard look at it to find ways of making things easier on yourself next year. There’s good reason to do so, aside from reducing the anxiety that can build each spring as the tax-filing deadline approaches. “A lot of people make the mistake of going through the drudgery of completing a return, then sticking it in a folder and forgetting it,” said Eric Tyson, author of “Personal Finance for Dummies.” “That’s a mistake because taxes can be one of your biggest expenditures, so it’s important to try to see what you can do better next year.” The first thing to look at is whether you’ve maxed out your retirement accounts, Tyson said. That’s because contributions to company-sponsored 401(k) accounts and traditional Individual Retirement Accounts reduce a saver’s taxable income dollar for dollar. One place to find out is by determining whether you owed a lot in taxes this April or expect a sizable refund. “If you owed big … you need to change your W-4 because you’re underwithholding severely,” she said. “If you got a lot back, you need to reduce your withholding.” Workers can fill out the Internal Revenue Service’s Form W-4 “Employee’s Withholding Allowance Certificate” to increase or decrease the amount withheld from their paychecks for tax purposes. The form, available on the IRS Web site at, includes a work sheet to help taxpayers calculate how many exemptions to claim. LeValley also pointed out that many people claim the standard deduction on their tax forms even though they could reduce their tax bills by itemizing their deductions. In fact, about 65percent of taxpayers claim the standard deduction while 35percent itemize, IRS data show. “Some people seem to think it’s safer taking the standard deduction,” LeValley said. “But if people can reduce their taxes with legitimate itemized deductions, they should.” LeValley urged taxpayers to look at how life changes could affect next year’s tax returns. The birth of a child, marriage or divorce, or the death of a spouse all trigger tax changes, she said. So does buying a home or getting a work bonus. “There may be times you want to consult a tax professional,” she said, adding that it’s best to plan ahead because “after the year is over, it’s too late to change things.” The IRS has a suggestion, too: “You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year.” This will not only help you remember various transactions that should be reported next April, but also let you document the deductions you claim. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! The limit on 401(k) contributions for 2007 is $15,500, with workers 50 and older eligible to add $5,000 more in a “catch-up” contribution. For IRAs, the limit is $4,000, with a $1,000 catch-up provision for older contributors. Another way to reduce taxable income is to take advantage of a company’s flexible spending accounts. These accounts, funded with pretax dollars, can be designated for health care expenses such as copays for visits to doctors’ offices, eyeglasses and dental work. Similar accounts can be set up to cover the costs of dependent care or for transportation. “If you’re going to spend the money on something like health care anyway, you might as well cycle it through the (FSA) account and get the tax break,” Tyson said. Tyson also suggested that taxpayers look at their interest income and any reported capital gains to make sure their money is invested where they get the best returns or the best tax shelter. “At a minimum, look at what’s generating taxable interest income,” he said. “Say it’s a savings account. Then figure out if you can earn a higher rate of return, say, in a money market account. … Or you might do better in a tax-free money fund.” Donna LeValley, contributing editor for J.K. Lasser’s “Your Income Tax” guide, calls the 1040 tax form “your road map of where your money goes.” last_img

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