Saturday, May 05, 2007

What about next year's taxes???

Less than 8 months away...

Unless you've extended your return, 2006's return is done and filed! It's time to move on. Some important items to consider
DON'T FALL BEHIND. The hardest tax problems are those when people don't keep up on their taxes. It can happen when you reduce your withholding too much. It can also happen when you don't keep up with your estimated tax payment obligations. If you own an interest in a partnership or an S corporation, it can become a problem in a hurry, especially if you spend the nice distributions they give you without putting them away for your taxes.

Most people who come to their tax preparers in April looking for a miracle have already squandered most of their tax-saving opportunities. These are likely to be found at work. Take advantage of the following:
- Maximize your 401(k) contribution. If you aren't at least putting in enough to get the entire employer match, you are making an unforgivable financial blunder. More is better.
-Small Business owners can start a SIMPLE, SEP, or a plethora of other savings vehicles that are in ways superior to a company 401k program.
- Review your health plan opportunities. If your employer offers an Health Savings Account option, think several times before rejecting it. Many employers offer generous breaks to switch to high deductible health insurance, and often you'll be financially better off with an HSA. If there is no HSA at your job, make sure you take full advantage of any cafeteria plan.
- Start funding your 2007 IRA. The main benefit of an IRA is tax-free buildup of earnings; if you fund it now instead of next April, your earnings are tax-sheltered an extra year.
- If you are saving for college, put a little money away in a Section 529 or a State Prepaid College plan.

EXPECT THE UNEXPECTED Every tax preparer has seen someone with a $500,000 W-2 struggle to raise $15,000 to pay taxes in April. It's wise to be prepared for a tax surprise, especially if you own all or part of a business; Some advisors say you should keep cash available to pay six months of living expenses; you might do with less if you have ample liquid investments, or if you have an untapped home-equity line. If you start getting ready now, maybe next April won't be so bad.

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