Tax planning can cure last-minute filing pain

Now that this year's tax-filing deadline has passed, if you’re like most people, you probably want to stuff those papers in a box and put the whole business out of mind.

But first, look through the 2006 return one more time. It’s a good way to start your tax-minimizing strategy for 2007. That will mean using some standard tactics as well as looking at new opportunities.

Some low- and middle-income taxpayers, for example, now have an unusual opportunity to avoid capital gains tax entirely by postponing sale of profitable investments until 2008. And mutual fund owners need to be especially wary of those nasty year-end distributions, which could be bigger than ever this year.

But first, some longstanding tips:

• Swear you’ll never do this again — wait until the last minute. Tax rules change every year, and last-minute filers, on top of going gray and snapping at their families, are more likely to make costly mistakes.
• Put all you can afford to into your 401(k) or similar tax-deferred plan at work. Every dollar invested will cut your tax bill by 25 cents, assuming a 25 percent tax bracket.
• Use flexible-spending plans at work to get similar tax savings on money set aside for dependant care and medical expenses. Your benefits folks will have details.
• If you have children or grandchildren, think about setting up a state-sponsored Section 529 college-savings plan. There’s no up-front federal tax savings, but contributions are deductible in some states. And investment gains will be tax free if used for tuition and other qualified expenses. Investigate these at www.savingforcollege.com.
• Keep good records. Starting in 2007, for instance, you’ll need cancelled checks or receipts to support cash contributions to charity.

Now, think about this past tax season.

Did you get a refund? Most people are happy to. But this really means you gave Uncle Sam an interest-free loan. It’s better to get that money earlier and earn interest yourself. You can do that by filing a new W-4 form at work to reduce your paycheck withholding. Your payroll people should have the form, or you can get it, as well as all other IRS forms and publications, at www.irs.gov.

If you had to pay money this spring, you can avoid a repeat by filing a new W-4 to increase your tax withholding. This will help you avoid interest charges and penalties that often accompany a balance due.

Oftentimes, a balance due is caused by investment gains realized during the year – when you sell a profitable stock or mutual fund, for example. It’s hard to know just how much tax these will trigger because you may have money-losing investments that can be sold by year-end to offset the gains.

Still, make your best estimate of the tax due and pay it during the year with Form 1040-ES. The first estimated payment was due April 17, and the remaining three June 15, Sept. 17 and Jan. 15. Payments will reduce or eliminate interest and penalty charges, and any overpayment will come back in a refund next year.

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