5 post-year-end tax strategies to reduce your 2007 tax bill

Now that you’ve closed the books on the 2007 tax year, you may think you’re finished tax planning for it. But there’s still time for you to implement these five post-year-end strategies that can reduce your 2007 tax bill.

1. Contribute to your IRA

You have until April 15, 2008, to contribute to an IRA and deduct that amount on your 2007 return. You can even open a new IRA by April 15 and still make contributions for 2007.

2. Check your receipts

An examination of your bank records, credit card statements, receipts and other documents may reveal valuable tax-saving opportunities. For example, you can deduct sales taxes in lieu of state and local income taxes on your 2007 return, so look for any large purchases that would make the sales tax deduction a more beneficial tax strategy.

3. Simplify your retirement plan

If you’re self-employed, you can contribute up to the lesser of $45,000 or 20% of self-employment income adjusted for half of self-employment tax to a Simplified Employee Pension (SEP) plan. Even better, you can set up and fund a SEP plan as late as your extended tax return due date (Oct. 15, 2008) and still deduct the contribution on your 2007 return.

4. Don’t cut your losses

If you’re a shareholder in an S corporation, your ability to deduct corporate losses in 2007 may be limited by your tax basis in your stock. If the corporation has accumulated earnings and profits left over from its days as a C corporation, you may be able to increase your basis by having the corporation file a deemed dividend election on its tax return. Keep in mind that the other shareholders must approve.

Provided you meet the requirements, a deemed dividend election assumes that the corporation made a pro-rata distribution of some or all of its accumulated earnings and profits to its shareholders on the last day of 2007. It also assumes that the shareholders immediately transferred the funds back to the corporation as a capital contribution. As a result, you and the other shareholders owe capital gains taxes on the deemed dividend. But your basis is increased by the fictitious capital contribution, allowing you to deduct a greater portion of corporate losses from ordinary income.

5. Spare no expense

If you’re self-employed or own a small business and acquired any equipment or other fixed assets during 2007, take advantage of Internal Revenue Code Section 179 to write off the expense. You can elect on your 2007 return to expense up to $125,000 worth of qualified property instead of depreciating it over the property’s useful life. The expensing election is reduced to the extent the cost of qualified property placed in service during 2007 exceeds $500,000.

Act now

Time is running out to act on these tax tips. Talk to your tax advisor about these and other strategies you can implement now to soften the blow of your 2007 tax bill. •