Items to Consider Before Starting your 2007 Return
Review prior returns
It's time to pull out and review some of your prior-year returns. As a result of a recent IRS ruling and legislation, you just might have refunds coming. You can use Form 1040X to file your amended returns.
For instance, payments under the Department of Veterans Affairs Compensated Work Therapy program are no longer taxable and disabled veterans who paid tax on these benefits in the past three years can now claim refunds.
This is the result of a U.S. Tax Court decision that IRS decided was meaningful enough to reverse a 42-year policy. To claim deductions for these fringe benefits write "Filed Pursuant to Revenue Ruling 2007-69" at the top of each amended return.
S corporation shareholder?
Another example of a change: Shareholders of S corporations may be able to amend their past three years' returns if they didn't use the self-employed health insurance deduction as an adjustment to income.
Under a recent IRS notice, if the stated conditions are met, qualifying premiums for the entire family's accident and health insurance premiums are deductible. The premiums must be included in the shareholder's wages, but they are not subject to Social Security and Medicare taxes, as under the previous policy.
The policy must be an employee policy, covering all employees, not just shareholders. (Note: Often shareholders are the only employees.) The corporation must be paying the premiums on the plan directly, or it must be issuing reimbursement checks to the shareholder/employee. The shareholder/employee cannot simply pay it out of pocket without having been reimbursed.
IRS had been denying these deductions if the health policies were not issued in the name of the corporation. To claim deductions for these fringe benefits write "Filed Pursuant to Notice 2008-1" at the top of each amended return.
Updates to consider
Update your mailing address with all your 2007 employers, clients and financial institutions if you've moved or changed postal boxes. You don't want to miss any W-2s and 1099s heading your way. Your current and former employers and 1099 providers must mail them out by Jan. 31.
It's time to review your paycheck withholding so it reflects the income and deductions you expect to have for 2008. If you need to increase or decrease your withholding, file a new Form W-4 with your payroll department. Remember to file a copy for your state, too, if that needs to be changed. What would trigger a need to make changes? Marriage, divorce, a new home, more money going into your retirement account.
You can find free tools online to help you project your 2007 balance due:
TurboTax's Tax Estimator - http://turbotax.intuit.com/tax-tools/
H&R Block's Tax Estimator - http://www.hrblock.com/taxes/tax_calculators/index.html
Bankrate.com's 1040 Estimator - http://www.bankrate.com/brm/calculators/tax/1040_tax_calculator.asp
Those calculators will help with more than your estimated taxes. Print out that information for your student loan applications, too.
Timely student-loan filings
Most schools and colleges have February and March filing deadlines. Start now! Rather than scrambling at the last minute, sort out your finances now and start drafting up your answers.
The Free Application for Federal Student Aid (FAFSA) site (http://www.fafsa.ed.gov/) will let you enter and save information as you go along. You can edit the data as you get better information. Don't worry. The information doesn't get submitted until you sign the application electronically and transmit it.
Remember to get your ex-spouse's or absent parent's information or signature to complete it. For those folks who are planning to ask a tax professional for help filling it in, let them know immediately so they can set aside some time.
Exempt Filers
Those folks who filed "exempt" on their 2007 W-4s need to turn in a 2008 W-4 by Feb. 15. The IRS wants you to confirm that you still won't owe any taxes in 2008.
This is typical for people who won't earn much during the year, or whose itemized deductions and other deductions tend to be high enough to offset all their wages.
Exemption from withholding does not universally apply to all students. That's a myth. Many students are shocked to learn when they finish their return that they earn enough income to end up owing taxes.
The IRS no longer requires your company's payroll department to report you if you claim more than 10 exemptions. IRS won't bother you as long as you pay your taxes in full by the time you file your tax return, within the filing deadlines, of course.
Start record-keeping now
Do you get to deduct your vehicle expenses, either as an employee or business owner? Mark down your odometer readings for the beginning of the year. This is a good time to start tracking your business mileage for the year.
Also, charitable givers, remember to get receipts for all your charitable donations. Your cancelled check will not suffice. Be sure the receipt includes the name and address of the charity, the date and amount of your donation, and the phrase "no goods or services were received" or the value of the goods or services you did receive. It wouldn't hurt if the document also included the organization's taxpayer identification number. Call them now and be a pest. Some charities and religious organizations don't yet understand their obligations on this score.
The tax laws of 2007
Here are links to the federal tax laws passed in 2007:
Dec. 29, 2007 - Tax Technical Corrections Act of 2007 - (HR 4839)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.4839:
Dec. 26, 2007 - The Tax Increase Prevention Act of 2007 - (HR 3996)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.3996:
Dec. 20, 2007 - The Mortgage Forgiveness Debt Relief Act of 2007 - (HR 3648)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.3648:
Dec. 12, 2007 - Defenders of Freedom Tax Relief Act of 2007 - (HR 3997)
Heroes Earnings Assistance and Relief Tax (HEART) Act of 2007 - (HR 3997)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.3997:
May 25, 2007 - Small Business and Work Opportunity Tax Act of 2007 (HR 2206)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.2206:
Mar. 14, 2007 - Freedom of Information Act Amendments of 2007 (HR 1309)
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.1309:
Apr. 17, 2007 - Taxpayer Protection Act of 2007 - (HR 1677)