Before the ink has dried on your 2007 income tax return, it wouldn't be a bad idea to take a careful look at what changes you can make this year -- from adjusting your withholding to reviewing investments and adding to retirement accounts -- that will benefit you at tax time in 2008.
"The earlier in the year you start planning, the more you're going to save," said financial adviser Jonathan D. Pond, author of "Grow Your Money -- 101 Easy Tips to Plan, Save and Invest." ''There's very little you can do in late December to make big inroads on your taxes." An obvious first step is making sure you have a system for keeping track of tax-related documents, said Rande Spiegelman, vice president for financial planning at the Schwab Center for Financial Research in San Francisco.
"If you found yourself spending more time gathering your records than preparing your return this year, you might want to develop a new system," Spiegelman said. "It could be as simple as two envelopes -- one for expense receipts, the other for income items." He added that, "even if you use a professional tax preparer, you can cut the fees if you're organized going in." Pond said something else to look at is whether you got a big refund. The Internal Revenue Service says refunds this year are averaging $2,637, up from $2,578 last year.
"Getting a big refund is bad news," said Pond, who describes it as similar to giving "an interest-free loan to Uncle Sam." Instead, he suggested, anyone with an outsized refund should go to their employer and fill out a new Form W-4, Employee's Withholding Allowance Certificate, to lower the amount withheld from wages. The IRS has a calculator on its Web site at www.irs.gov to help workers project their correct withholding rate.
Those who want to put that extra money to good use -- or others who are looking for an added tax break for 2008 -- can increase contributions to their company-sponsored 401(k) retirement accounts or open Individual Retirement Accounts.
Savers get a double tax benefit using these accounts because contributions reduce their taxable income and the retirement savings grow tax-deferred.
The limit for 401(k) contributions remains at $15,500 in 2008, with an additional $5,000 allowed for workers 50 and older. The limit for IRA accounts rises to $5,000 this year from $4,000 last year, with a $1,000 catch-up.
"It's nearly impossible to put too much money into retirement plans," Pond said. "And the reason you want to start (funding them) early in the year is that you can build up a significant amount."
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