Tackling Taxes: Use the Last Days of '07 to Affect '08

Dec. 27, 2007 — -- Tax time is here again. Get out your calculators, organize your receipts and take note — Mellody has some last-minute tips to help you minimize the pain.

Is there anything new this year that could trip up taxpayers?

Yes, the elephant in the room this year for taxpayers is the dreaded Alternative Minimum Tax — or AMT. The AMT was created in 1969 as a way to prevent the wealthiest individuals from making tax deductions greater than their income tax bill. The problem is, Congress did not adjust the tax for inflation, so every year, more and more people are being hit with the AMT — not just the wealthiest taxpayers. In fact, if the president and Congress cannot agree on a tax bill by the end of the year, 25 million people could feel the wrath of the AMT. The headline: Refund checks will be held up while the IRS tries to figure out who needs to pay the AMT. The delay could affect 38 million refunds totaling more than $87 billion, according to the IRS.

In light of this possibility, is there anything people can do to speed up the process?

Of all years, this should be the year of accuracy. I always like to tell people to think of Dec. 31 as if it were April 15. Now is the time to gather all your receipts and documents that are necessary to file on time. You can avoid some of the most common snafus — such as a missing Social Security number or signature — by simply taking your time and being thorough. And mistakes can be costly — a missing Social Security number can result in the IRS holding back your refund or even preventing you from taking any number of credits. Remember, while there is a penalty for filing late, there is no penalty for being prepared and filing early.

Is the last year to take advantage of green tax breaks?

Yes, some of the tax benefits for making energy-efficient home improvements will expire at the end of this year. The Energy Tax Incentives Act of 2005 established credits of between $500 to $2,000 for homeowners for such things as adding better insulation or sealing a leaky window. So, now is the time to run out to the hardware store and make some simple improvements. Also, for car buyers, time is running out on the credit available for a hybrid vehicle purchase. The IRS mandates that once a car manufacturer sells more than 60,000 models, the credit phases out — and it has already disappeared for the Lexus hybrid. The IRS has a list on its Web Site of hybrid vehicles that still qualify for the credit.

What other tips do you have that could save me money in 2007?

If you itemize your tax returns, today is an excellent time to pay your January 2008 mortgage payment. If you pay your mortgage by Dec. 31, you can deduct the interest this year. For example, let's assume you have a $150,000 mortgage at a 6 percent rate and pay $750 every month in interest alone. you could save more than $187 in 2007 by paying your mortgage before the end of this year (assuming a 25 percent tax bracket). In essence, by paying your mortgage in advance, you can deduct the monthly interest payment from your 2007 tax bill.

One of your favorite reminders every year is that people need to use it or they will lose it. What exactly are you referring to?

If you have been contributing to a flexible spending account (FSA) at work, be sure to use all the money you have deferred over the course of 2007. FSAs permit employees to contribute pretax dollars to an account established specifically to pay for medical and child care expenses. Covered expenses include eyeglasses, birth control, dental work (not including cosmetic), co-payments for prescription drugs and doctors' visits, as well as many over-the-counter medicines, such as antacids, allergy medicine, cold medicine and pain relievers. The upside of FSAs is that by contributing pretax dollars, you lower the amount you pay in income taxes, but the downside is that you have to spend all of the money you have deferred by Dec. 31 or you lose it.