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Check out these money-saving ways to report income, deductions, and credits on your 2007 return.
"It ain't over till it's over." Though the book is closed on your 2007 financial transactions, you still have tax-saving choices to make when you report them on your return. Keeping Yogi Berra's wise saying in mind, we'll take a quick trip through Form 1040 to pinpoint opportunities that may apply to you.
Claim the right filing status. Determining filing status is usually a simple matter, but when family circumstances change, the rules can get complicated, warns CPA Sherman Doll, a personal financial specialist based in Walnut Creek, CA. For instance, a California gynecologist whose husband died in 2006 won't be filing a joint return for 2007. Because she has an 8-year-old daughter, she expected to file as head of household. Fortunately, the records she gave her new accountant showed the date of her spouse's death. He advised her to check "qualified widow with dependent child" on line 5 of her Form 1040, entitling her to joint-return rates. That way she'll pay nearly $2,900 less on her $128,000 taxable income for 2007 than she would as head of household. Unless she remarries, she'll be able to claim the same status for 2008, then head of household in subsequent years.
Get extra value from a stock dividend. A stock that an Atlanta surgeon bought on Nov. 16, 2007 paid a dividend to investors holding shares on Dec. 10. He must report the $1,200 he received, on line 9a of his 2007 return. The Form 1099-DIV issued by the company indicates that the dividend income qualifies for the 15 percent capital gains rate instead of the ordinary income rate, which in the doctor's case would be 33 percent. The catch is that the favorable rate applies only if the stock is held at least 61 days, a requirement he obviously didn't meet in 2007.
Handle state tax refunds with caution. If you got a refund in 2007 because you overpaid state income tax in 2006, you generally have to include the amount as income on line 10 of your return-but not always. Suppose you claimed the standard deduction on your federal return for 2006. In that case, the size of your state tax payments in 2006 had no effect on your federal tax, so you can leave line 10 blank on your 2007 return.
Even if you did deduct your state tax payments on your 2006 federal return, you may not have to report the full amount of a 2007 refund. A Chicago internist received a $2,000 refund in 2007. He had taken an $8,000 state income tax deduction in 2006. He could instead have claimed a $6,900 state and local sales tax deduction for 2006, helped by the purchase of a new car for personal use that year. As a result, his net excess deduction was just $1,100 ($8,000 minus $6,900). Therefore, he needs to show only that amount on line 10, not $2,000.
If you're not sure how much of your refund is reportable, the worksheet on page 20 of the Form 1040 instructions will simplify the arithmetic. IRS Publication 525 can be of help in more complicated cases or if you were subject to the alternative minimum tax (AMT) in 2006.
Pare down capital gains. The 15 percent tax break on long-term capital gains gets even better if you can trim the amount you have to show on line 13. Say you bought shares in a mutual fund at different times and prices and sold a portion of your holding at a profit last year. Generally you'd have to figure your gain based on the cost of the oldest shares, but you may be able to report less of a gain by using the average-cost method. Many funds will calculate the average and provide a statement for your records.