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Tax Planning

Tax planning can be intimidating, even for those who are financially savvy. It is one of the most complicated areas of managing your money, and many people put off dealing with it until they absolutely have to. However, preparing ahead of time for the inevitable makes the process more bearable-and creates opportunities to save considerable sums of money.

Proper tax planning starts with filing your return correctly and taking advantage of the tax breaks offered to you. But it also involves regular consideration and record keeping all year long as well as crucial moves before December 31.

What tips should I keep in mind when preparing my tax return?

If you worked for wages and had federal taxes withheld, you will have to file a return to get your refund.

Before mailing your return:

TIP: For help with your tax return, tax filing errors and other tax topics, call TeleTax at 800.829.4477 or visit,,id=120193,00.html.

What are common tax mistakes to avoid?

Do not lose track of your receipts. You have to have proof of your expenses if you want to deduct them. Keep them for at least 3 years, which is the statute of limitations for the IRS to disallow deductions. If you are audited before then, organize your receipts by deductible category to make the audit go smoother.

Figure out which form will enable you to pay the least in tax. Even if your finances are relatively simple, you might be able to take deductions with the 1040A and 1040 forms that you could not with the 1040EZ, and the longer forms do not take that much more time to fill out. For example, you might be able to deduct student loan interest and contributions to an IRA and therefore lower your overall taxable income.

Do not forget to report unearned income, such as interest and dividends, because the IRS already knows about it. You might owe tax on that money, and if you fail to report it, you will have to pay penalties and interest charges as well.

If you get married during the tax year, remember that the marriage penalty applies if both spouses work. You will both have to pay more in taxes than you would have if you had remained single. However, if only one spouse works, you will experience a tax savings from marriage. Adjust your withholding immediately so that it reflects your new situation, or you could end up owing more than you expected to pay.

How can I use my tax return to help me plan for next year?

valuate the following areas of your tax return:

IRA contributions

Contribute the maximum allowable amount to your individual retirement account (IRA). Make that contribution earlier in the year rather than later so you build up more tax-deferred income faster.

TIP: Start maintaining tax records throughout the year. That way, you will always know where you stand and what steps you should take before year-end-and you will not have to scramble at tax time to find the information you need.

What should I do tax-wise before year-end?

What kinds of charities qualify to receive tax-deductible donations?

Most well-known public charities are called 501(3) charities, or "50 percent limit" groups. That means that for cash donations, you can donate up to 50 percent of your annual adjusted gross income (AGI) to them.

You can still make deducible donations to qualified charities that are not 501(3) groups-such as fraternal societies and memorial scholarships-but you can only make cash donations up to 30 percent of your annual AGI.

For donations of appreciated property, such as investments or art, you can donate up to 30 percent of your AGI to a 501(3) organization and up to 20 percent of your AGI to a non-501(3) group.

TIP: If you donate appreciated property, transfer it directly to the charity. Do not sell it and give the group the cash because you will owe capital gains taxes on the profit from the sale.

The charity should be able to tell you what type of organization they are and to what extent donations to them are deductible.

TIP: Find out if a charity qualifies to receive tax-deductible donations by visiting the IRS at,,id=249767,00.html. IRS Publication 78, Cumulative List of Organizations, is also available in many public libraries.

How late in the year can I make a charitable donation and still take a deduction for that tax year?

In order to be deductible for that tax year, the contribution must be made by December 31. That is, the charity must receive your payment, either by credit card or check, by that date. The contribution is deductible even though your credit card company may not bill you or your bank may not debit your account until the new year.

TIP: If you have questions about the deductibility of charitable donations, call the IRS Tax Help Line for Individuals at 800.829.1040.

Can I donate my car to charity and get a deduction?

Yes. If you donate your car to a qualified charity, you can deduct the fair market value of the car. If the car is worth less than $5,000, you can look up its value in the Kelley Blue Book. If it is worth more than $5,000, you need to have its value determined through an appraisal.

What kind of documentation do I need to prove I made a charitable donation?

The more you donate, the more documentation you need:

If the donation is worth less than $5,000, you do not have to attach the documentation to your tax return, but you do need to keep it in your records in case the IRS asks you to prove you made the donation.

How can I invest more tax-efficiently?

If you want to invest more tax-efficiently with income-generating investments, you might consider tax-free investments, such as municipal bonds or dividend-paying securities, which are now taxed at 15 percent in most brackets.

If you want to invest more efficiently with investments that provide capital appreciation, you should focus on long-term capital gains, which are taxed at 15 percent, rather than short-term capital gains, which are taxed at your ordinary income tax rate. Along those lines, you should consider mutual funds that hold stocks for longer than 12 months and have low turnover. Some mutual funds promote the fact that they are tax-efficient. Index funds and exchange-traded funds tend to be very tax-efficient because they do little buying or selling of securities and therefore generate few capital gains distributions.

Investing through tax-advantaged savings plans, such as IRAs, Roth IRAs, 401(k) plans, Coverdell Education Savings Accounts and 529 college savings plans are very useful ways to minimize taxes. Your contributions to these types of accounts may be tax-deductible and allow you to defer taxes on the earnings generated. It makes sense to keep high-tax income-generating securities in these accounts.