December 31 is two weeks away. That's two weeks you can use to trim your tax bill for 2007 and the the biggest question for many people is: can you do anything to avoid the AMT? The AMT is an alternative tax system set up in 1969 to prevent the very wealthy from not paying their fair share.
Unfortunately, due to the fact that it wasn't pegged to inflation, it has caught more people in its grasp each year, erasing millions in deductions, and now reached down to impact people making just $75,000 a year. Unfortunately, there's really no easy way to tell if you are going to get hit with the AMT. My advice, if you make over $75,000 a year, talk to an accountant or run your information through a tax software like TurboTax.
It is possible that Uncle Sam may step into help. On Thursday, the Senate passed a bill that would eliminate the AMT for between 19 and 23 million people, but only for 2007. The Democrats and Republicans are divided on how best to make these changes — though they are practically unanimous on the need for them. The House still needs to pass this bill which is a little bit contentious because it is not "paid for" as new tax proposals are supposed to be. Instead the cost would be added to the national debt. In the past President Bush has said he would veto any bill related to the AMT.The IRS is waiting to print its 2007 tax forms until this is settled.
So while we — like the IRS, which has not printed its 2007 tax forms — wait for an answer, is there anything you can do to trim your taxes for next year? Actually, there is. Discover 5 ways to trim your tax bill:
Make your charitable contributions now
The basic rule is that the contributions to public charities, colleges, and religious groups can't exceed 50 percent of your adjusted gross income (AGI). If these restrictions limit the write-off in the year of the gift, the excess deduction carries over to the next year.
What do you do if you're not sure what is the value of the things you're giving away?
You can go to a website like ebay to figure out what's the value of the stuff you're giving away. (There's also a good software program that's updated each year called It's Deductible.com, produced by TurboTax.) Note: It's not enough to make a list anymore, you can only take deductions for things that are in good condition or better (this rule went into effect in August, 2006). If your contribution is $250 or more, you can claim a deduction only if you have written acknowledgement — i.e. a receipt — from the organization. If the value of the merchandise you're giving away is worth $500 or more, you have to fill out section B of IRS form 8283. And at $5000 or more, you need an appraisal.
And seniors note: You may come out better by taking a tax-free IRA distribution. This year, IRA owners who are 701?2 or older can make direct, tax-free donations of up to $100,000 from their IRAs to qualified charities. The donation can satisfy you annual required minimum distribution. Although you can't claim a charitable deduction, you may still come out ahead because the donated IRA amount is not included in your adjusted gross income. By lowering your AGI, you could benefit from other tax breaks, such as reducing taxes on your Social Security benefits or boosting your deductible medical expenses. This tax break was scheduled to expire this year, but Congress extended it.
You can reduce your tax bill by up to $500 if you install insulation, windows, doors or central air conditioning that meet certain energy conservation standards. You also can take a credit of up to $2,000 if you install a solar-powered hot water system or solar photovoltaic panels, which convert sunlight into electricity. (That $2,000 can represent 30% of what you spend. But no part of the system can be used to heat a pool or hot tub.)
Are there constraints on how much you can take for any one type of installation? According to the IRS website, IRS.gov, you can take $50 for each main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, Installing a high-efficiency air conditioning system or water heater qualifies for a $300 tax credit and window-related expenses are capped at $200.
Make extra retirement contributions
Did you max out your ability to put money into your company's retirement plan (typically a 401(k). The maximum contribution you may make this year is $15,500 (or $20,500 if you're 50 or older).
If you did not, you may actually be able to make an additional contribution now. This is particularly true if you work for a small company - with a facile benefits department, and those who work for themselves. Also, make sure a regular 401(k) contribution is in your best interest. This is the first year we've had the Roth 401(k) accounts. High earners are able to take advantage of the tax-free growth of Roth accounts.
Remember, by opting for a Roth, you forgo a little instant gratification by not getting a tax reduction for your contribution this year. But the nest-egg that you build for retirement will be tax-free, which is nice on the back end. And if you work for yourself and it's your intention to put money into a Keogh plan this year — ask your accountant — remember you have to establish that account before December 31, though you don't have to fund it until you file your taxes.
Sell losing stocks to offset gains, income
The volatility in the stock markets this year (14000? 12000?) has been trying for investors. The result for active traders is that if you've realized any capital gains this year, you may have capital losses in your portfolio to offset them. To do that, you have to sell the losing investments by year-end. Your losses can offset 100 percent of your capital gains plus up to another $3,000 in ordinary income. If you have losses beyond that you can carry them forward to use on future tax returns.One caveat, though: your loss will be disallowed if you reinvest in the same stock or fund that you sold within 30 days before or after the sale. This is the so-called wash-sale rule.
Note: You may also want to think about the fact that next year — 2008 —S there will be a 0% tax rate for capital gains for those in the lowest tax brackets and an expansion of the kiddie tax. That means two things. If you have a college-age child who owns appreciated stocks, mutual funds or other investments, consider selling those investments before the end of the year. And if you have an older low-income parent you take care of, you may want to use this year's gift exclusion ($12,000 per person without worry of gift tax) to give them appreciated stocks and bonds instead of cash. Next year, they can sell those investments without paying capital gains.
Defer income and accelerate deductions
There are times when it makes sense for tax purposes to either defer or accelerate taking income or selling an investment. Generally speaking, if you're in a high tax bracket it may reduce your tax bite if you postpone some income to next year. That's because the income ranges that apply to each tax bracket go up with inflation annually, so more of your income will be taxed in 2008 at lower rates. The kinds of payments you might consider postponing: a bonus or payment of bills from your clients if you run a small business. In order for it to be considered 2008 income, the checks must be issued in 2008. If you get a check in 2007 and just don't deposit it, it will still count as 2007 income.
For retirees planning to take large distributions from their IRAs, it may make sense to take part in December and part in January. By doing so, you may avoid moving to a higher tax bracket in either year, and keep more of your Social Security benefits from being taxed as well.
On the other hand, there are cases when it may pay to take more of your income this year. For instance, if you're planning to sell some appreciated stocks or funds and you have a good chance of being in the 10 percent or 15 percent tax bracket next year if you take more income this year, you'll enjoy a 0 percent capital gains and dividend rate in 2008.
You'll also want to try to time your deductions. If your last 2007 property tax bill is due in January, opting to pay it in December will boost your deductions for this year. (Don't do it if you think you'll be paying the AMT which disallows deductions for property taxes.) You also might consider making an extra mortgage payment this year since you can deduct the extra interest. The same principle applies to any other itemized deductions such as charitable contributions, job-related deductions or medical procedures (if you think your medical costs for the year will exceed 7.5 percent of your adjustable gross income).
Finally, you say you should check and see if your Flexible Spending Accounts (for healthcare or dependent care) has a grace period. Traditionally the money you put into these accounts has to be used by year-end - and if you don't use it, you lose it. More recently, some FSAs have added grace periods of up to 2 1/2 months to incur the expenses and 3 months to submit the bills. But if yours doesn't have one you should use the money before you lose it - note: Over the counter medications can be purchased with FSA dollars. Load up before the calendar turns to 2008. Then don't forget to submit the bills to your plan administrator.
Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .