The deadline is again April 15 (it was pushed later the past two years because of weekends and holidays). And at least there's a place on this season's 2007 income tax return for all the deductions you're allowed. Last year some filers had to follow procedures improvised by the IRS to claim expired breaks that were reinstated by Congress after returns were printed.
But the ever changing tax code is never to be taken for granted. You can't rest easy even if you hire an accountant or other preparer. "People will end up with a better job if they are at least somewhat knowledgeable about the process," says CPA Edward Mendlowitz, at WithumSmith Brown in New Brunswick, N.J.
A good preparer will ask about your financial and family situation and suggest possible tax-saving approaches, but nothing beats a well-informed client primed with pertinent questions and the documentation to get a preparer rolling, he says. Here are some things to keep in mind as you turn to your taxes:
Tax breaks that are still alive
Back after near death are revived breaks that are still kicking for 2007. Among them are deductions for:
- College tuition—Up to $4,000 as an alternative to the popular Hope and Lifetime Learning tax credits that some people may not qualify for.
- Teacher's spending—Out-of-pocket outlays of up to $250 by elementary, middle, and high school teachers for classroom supplies.
- Sales tax—As an alternative to deducting state income tax, people with big-ticket sales tax bills and modest or no state income tax payments can choose to deduct state and local sales tax.
Second-chance phone rebate
After the government acknowledged that it erroneously collected a 3 percent excise tax on long distance phone calls, taxpayers were offered a partial rebate on their 2006 tax return, but the IRS says many eligible taxpayers haven't claimed it.
To still get the rebate you can use form 1040X to file an amended 2006 return. People with low taxable income who weren't required to file a regular 2006 return can seek the rebate with a special simplified form, the 1040EZ-T.
The easiest approach: Accept a settlement of $30 to $60 that requires no phone bills or other documentation.
Index me up
It's easy to forget that important numbers may change because of indexing for inflation.
Among changes for 2007:
- Exemptions—The amount you can deduct for yourself, your spouse, and each dependent is $3,400, up $100 from 2006. And you can have more income before the exemptions begin to phase out—now $156,400 for unmarried singles and $234,600 for married couples filing jointly.
- Standard deduction—Yearly boosts can make itemizing less worthwhile, especially for older people. The standard deduction for a married couple 65 or older, for example, rises $500 to $12,800 for 2007. Younger couples get $10,700; singles, $5,350; and heads of household, $7,850.
- Itemized deductions—One limit is that they are only partially allowed when adjusted gross income exceeds a ceiling, but the cap is now higher. It's $156,400 for all filers for 2007, up from $150,500 for 2006.
- Mileage—People who opt to deduct a flat amount per mile for business driving can recover 48.5 cents a mile for 2007, 4 cents more than in 2006. The rate for medical purposes and job-related moves is 20 cents, up 2 cents. Driving for charity is unchanged at 14 cents.
Even in a lousy market, tax rewards for owning your home continue—deductions for mortgage interest and property tax and an exclusion from tax for a profitable sale—yes, it still happens. Two breaks starting for 2007 can help the distressed at least a bit:
- Mortgage insurance—You may now qualify to deduct premiums for mortgage insurance against default on a new or refinanced mortgage, along with the loan interest. But the deduction in most cases phases out between $100,000 and $109,000 of adjusted gross income.
- Forgiven debt—Troubled homeowners could in the past face a surprise tax hit if their mortgage was reduced through foreclosure or a modification of its terms: The forgiven debt could be considered taxable income. That is generally no longer the case, though some tax instructions may not reflect the late 2007 change in the law.
Warning: Forgiven debt on a home equity loan that was not used to upgrade the house can still be taxable.