December 17, 2007

LINCOLN, Neb. — It's still four months before federal income taxes are due, but there are only a few days left in this fiscal year. That means time is running out on opportunities to increase tax returns or decrease the total due April 15.

Preparing taxes before the end of the fiscal year on Dec. 31 places taxpayers in the best position to reduce their tax burden, said Kathy Prochaska-Cue, a family economic specialist at the University of Nebraska-Lincoln.

Deciding whether to itemize or take the standard deduction is the first question many struggle with. Because of the confusing nature of the tax system, people who prepare their own taxes often take the deduction when they might save themselves money by itemizing, the Institute of Agriculture and Natural Resources specialist said.

"Dig out those tax-deductible receipts and calculate them to see if they add up to more than what the IRS allows for a standard deduction," she said. "Prepaying bills which are due early in the next fiscal year and claiming these deductions is an effective method to save money on this year's taxes."

Some bills that can be paid early to claim on this year's return include: real estate taxes, mortgage interest deductions and vehicle taxes.

Taxpayers should be sure to make use of all the tax credits they qualify for, Prochaska-Cue said.

One program available for low-income families in Nebraska is the Earned Income Tax Credit.

"Nebraskans are not applying for this as often as they should, and it is a good program for low-income families with small children," Prochaska-Cue said.

As with most tax codes, the qualifications for this change every year so taxpayers should check each year to see if they qualify.

Some taxpayers also can reduce their tax burden by avoiding the Alternative Minimum Tax.

"This tax was instituted in 1969 to be sure that wealthy Americans were paying their fair share, but it hasn't been readjusted for inflation or increased wages so it's now affecting upper-middle-income earners who were not its intended target," Prochaska-Cue said.

In addition, people using tax-advantaged flexible spending accounts need to be sure to use all the money in the account before the end of the year so that it isn't lost.

Flexible spending accounts are offered to employees and allow money to be contributed without being subject to the standard payroll taxes. These accounts can be used to pay for health care and child care expenses.

"The trick is to estimate conservatively when contributing to a flexible spending account, and if there is money left in the account in December it may be a good time to schedule a medical or eye exam," Prochaska-Cue said.

This year's tax burden also can be reduced by contributing to a traditional Individual Retirement Arrangement, or IRA. Traditional IRA accounts allow taxpayers to defer paying taxes on the contribution and the capital gains until it is withdrawn.

"Money can be added to these investment accounts until April 15 and they allow the contributor to start withdrawing money at 59 1/2 years old, but people should realize there are steep penalties for early withdrawal and there is a limit on how much can be added each year," Prochaska-Cue said.

People who dread preparing their taxes shouldn't let that be an excuse for procrastinating until next year.

"Find a certified tax preparer who is up to speed on all the tax laws. They will usually save their clients more money than the cost of their fees, and they take a lot of the confusion out of it for the taxpayer," Prochaska-Cue said.

12/17/07-JL

Kathleen Prochaska-Cue - Ph.D.
Family and Consumer Sciences
Associate Professor
(402) 472-5517

Sandi Alswager Karstens
IANR News and Photography
(402) 472-3030

Department: Child
; Youth and Family Studies