7 Tips to Reduce Your Tax Bill and Cut Your Risk of an IRS Audit
Contact Information:
Paul V. Thompson, EA, ABA, ATA, ECS
703-535-1590
Full Description:
By Paul V. Thompson, EA, ABA, ATA, ECS
Premier Accounting & Tax, Inc.
For many people, “March Madness” has nothing to do with college basketball. It’s all about dashing around gathering receipts, filling out tax forms and hoping to emerge on the winning side of the 1040 game.
Making a few smart moves in creating your tax-return game plan can save you hundreds or even thousands of dollars when you file your 2007 return. Here are seven tips—for individuals and small business owners—that can reduce your income-tax bill and cut your risk of an IRS audit:
Personal Strategies
1. Couples: Take ‘divide and conquer’ route to lower taxes. Most married couples dutifully check off the “Married filing jointly” box without a thought. That’s usually the best path, but it’s not automatic. In particular, married couples can trim their taxes by filing separate returns if one spouse has an unusually large proportion of the couple’s medical expenses, miscellaneous expenses or casualty losses. Also, some couples file separately to avoid joint liability on a return.
2. Have a college kid? You may want to skip dependency exemption. The Hope Scholarship and Lifetime Learning tax credit are great tax savers, but high-income people can’t take advantage of them because of the phase-out rules. If your income pushes you over those phase-out limits, you may want to let your dependent college student take the valuable credit instead. To allow that, you’d need to forgo the $3,400 dependency exemption for your college kid. That may not cost you anything anyway if your high income phases you out of the dependency exemption anyway.
3. Audit-proof your charity deductions. You may know that you need a receipt to prove donations of $250 or more. But you may not realize another key point: You must actually have those receipts in hand by the time you file your 2007 return. You can’t wait for the audit notice and then scramble to assemble the proof.
4. Write off mortgage points paid by someone else. If you bought a home last year, remember that you’re allowed to deduct mortgage points paid by the seller. The only catch: You must reduce the home’s tax basis by the amount of the seller-paid points when you sell. That means a bigger profit. But it typically won’t result in extra tax if your home-sale gain falls below the $500,000 threshold for married couples ($250,000 for unmarried).
Small Business Strategies
5. Expand home-office deduction with creative thinking. If you qualify for the home-office deduction, you can base part of your deduction on the percentage of your home that’s used for business. Most people simply divide the square feet used for business by the home’s total square feet. But in reality, the IRS says you can use any “reasonable means” to set that percentage. One often-overlooked (but legal) method: Divide the percentage of main rooms used for business by the total number of main rooms in the house. Run the numbers both ways—by square foot and per-room—to see which creates a bigger deduction.
6. Don’t forget 20 often-overlooked write-offs. Forgetting a few smaller business deductions may not seem like a big loss, but those omissions add up. Comb your records for deductible business expenses, such as: advertising costs, association dues, bad debts, charity contributions, coffee and food expenses, clothing required for the job, equipment, gifts to clients, home entertainment, insurance, interest on credit cards for business expenses, Internet fees, investment expenses, legal expenses, licensing fees, office supplies, repair costs, subscriptions, theft losses and travel expenses.
7. Claim big retroactive tax break by opening a SEP account. For business owners that haven’t yet established tax-advantaged retirement programs, now’s the time to establish a SEP account. Unlike other retirement plans, a SEP can be established in 2008 and still generate a large deduction on your 2007 return. Business owners have until the tax return due date (April 17 or the extended date) to do the SEP paperwork and make a deductible contribution.
This article highlights just a few tax-saving strategies for your 2007 return. Many others may apply to your situation.
Paul Thompson is the principal at Premier Accounting & Tax, Inc. located at 2121 Eisenhower Ave., Suite 200 in Alexandria, VA, www.thepremiertax.com, and can be reached at 703-535-1590 or by email at premiertax@cox.net.
