April 17 has come and gone, and you’ve probably had enough of tax season.
But don’t put those tax files away just yet. Now’s the time to begin tax planning for your 2007 tax return.
“One of my favorite quotes is, ‘Only turkeys do tax planning after Thanksgiving,”‘ said Paul Mueller, CEO and managing director of the District of Columbia office of UHY Advisors, a tax and business consulting company.
If you got a lot of money back from the IRS, you might want to make some changes for 2007, Mueller said. “A lot of people think it’s good news to get a refund,” he said. “What it really means is you made an interest-free loan to the government.”
If year after year you’re getting $2,000 or more in refunds, you need to change the withholding allowances on your W-4 form, said Mueller.
If you receive a salary, you can decrease the amount of taxes withheld from your pay by changing the number of allowances on your W-4 form.
Using your 2006 tax return, go through the worksheet on the W-4 to figure out how many personal allowances to take. You can also use the IRS calculator at irs.gov.
Higher-income taxpayers should examine their potential exposure to the alternative minimum tax (AMT) liability, recommends John Nersesian, managing director of Nuveen Investments based in Chicago.
“The AMT continues to impact a growing number of taxpayers, triggered by preference items including state income taxes, property taxes, itemized deductions and personal exemptions which are all added back in the AMT calculation,” Nersesian said.
The AMT was introduced to make sure that high-income earners didn’t use tax shelters to pay little or no income tax. But the AMT is affecting larger numbers of middle-income individuals because the amount of income that can be exempted has not been indexed for inflation.
Nersesian says the AMT exemption for married couples filing jointly will be $45,000 this year, down from $62,550 in 2006. For single individuals, it’s $33,750, down from $42,500 in 2006.
If you’re an investor, consider investing in certain municipal bonds, Nersesian suggested. The interest on “public purpose” municipal bonds used to finance capital projects for state and local governments is not subject to the AMT, Nersesian said.
However, if you are hit by the AMT, you might want to avoid investing in private purpose bonds. The interest earned on those bonds is tax-free unless you fall under the AMT. Of course, you always want to weigh an investment’s return versus the tax savings.
I know. Your head is hurting. If it is, that means you need to do some tax planning now to save yourself some bigger headaches next April.
Contact Michelle Singletary at singletarym@washpost.com or c/o The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
