In 2007, you have until April 17 to file your taxes, but don't let that "extra day" give you a false sense of security. It's still a deadline, and you won't want it to sneak up on you. So, you might want to borrow a page from the "Boy Scout Handbook" and "Be Prepared."
One of the best ways you can prepare yourself is to become familiar with "what's new." Some elements of the tax laws change almost every year and 2006 was no exception.
So, as you file your taxes for 2006, and as you look ahead to 2007, you'll want to stay current on those changes that may affect you, such as the rules governing the "kiddie tax."
Previously, children 14 to 18 could receive up to $850 in unearned income -- interest, dividends and capital gains -- without paying taxes, with additional unearned income being taxed at the child's rate, typically 10 percent. Now, under the new laws, the first $850 remains tax free, but the next $850 will be taxed at the child's rate -- and any income above that $1,700 will be taxed at the parent's rate, which could be as high as 35 percent. Obviously, if you have been transferring stocks or other assets to your children in the hopes of lowering your tax burden, these changes will affect your planning.
Another tax law change that could affect you is related to charitable giving. If you are 70.5, you are required to take distributions from your traditional IRA. But for 2006 and 2007, you can transfer up to $100,000 per year directly from your IRA to a charity, without paying income taxes on the money. Clearly, if you don't need the money, the ability to transfer large sums to a charity will be attractive to you. However, if you take advantage of this provision, you can't get a "double" tax break by writing off the contribution as a charitable deduction. In any case, consult with your tax adviser before making this transfer.
Apart from familiarizing yourself with recent tax law changes, what other moves might you want to make before the tax season comes to a close?
Here are a couple of ideas to consider:
- Contribute to an IRA. You can put money into your IRA for the 2006 tax year right up until the tax-filing deadline. If you don't already have a traditional or Roth IRA, you've also got until the filing deadline to open one for the 2006 tax year.
- Check for all available deductions and credits. Consult with your tax adviser to make sure you're taking advantage of all the deductions and credits you can claim.
Finally, don't be late. If you absolutely can't make the filing deadline, file for an extension.
Keep in mind, however, that a filing extension is not the same as a payment extension. On April 16, you're still required to pay the taxes you expect to owe. Generally speaking, the IRS requires you to pay at least 90 percent of your tax liability for the year. If you don't pay anything, you'll owe interest and late payment fees.
Don't wait until the last second before filing taxes. You can almost certainly achieve a more favorable outcome if you give yourself adequate time to prepare, plan and avoid mistakes.
Ross Hage is a licensed financial adviser with the firm of Edward Jones. For more information, call (928) 468-2281.