Reviewing your tax return may pay off later

Source: Reviewing Return Now Could Pay Off Next Year By ANDREA COOMBES

Start with the line 7 of Form 1040: Wages, salaries, tips.

Do you have access to a workplace 401(k) or flexible-spending account? This is one of the more obvious places to maximize tax savings.

Flexible-spending accounts let employees pay for dependent care and health-care costs with pretax dollars.

Some taxpayers forgo their workplace flex-spending account, and instead take the credit for dependent and child-care expenses on Form 1040's line 48. Please note that taxpayers with an adjusted gross income above $43,000 can take the credit on only 20% of such expenses, up to $3,000 for one qualified dependent, and $6,000 for two or more.

Lines 8 and 9:

High dollar amounts here should prompt you to look at your investments.

If you're reporting a lot of interest income, you might consider investing in municipal bonds to reduce your taxable interest income. But if you're subject to the alternative minimum tax, remember that some tax-exempt interest -- mainly interest from private-activity municipal bonds -- is subject to the AMT.

Line 13:

If you carried any capital losses over, you could use those losses to offset the gain from a winning stock, though you shouldn't sell an investment mainly for tax purposes.

Line 32:

If you had an IRA deduction, you should consider whether you'd be better off contributing to a Roth IRA if you're eligible. That would mean you're giving up your IRA deduction in the year you make your contribution, but your distributions from that Roth IRA would be completely tax-free.

Line 40:

Many people who take the standard deduction would save money by itemizing. There's a quick calculation to get a sense of what's right for you: Add up what you paid in state income taxes, real-estate taxes and mortgage interest. If the total is more than the standard deduction, you know what you should do next year.

Schedule A:

Check this form to ensure you maximize your possible deductions in the year ahead. For instance, there are new rules for the charitable-contribution deduction. You can only get a deduction for clothing and household items if they're in good used condition or better; and, starting this year 2007, you can only get a deduction for cash contributions if you have a canceled check or a receipt.

Line 44:

This line is for your total tax due. If you included tax on your child's unearned income, generally paid at the parent's tax rate, you made a huge mistake. You should report your child's unearned income on his or her own return - first $850 of unearned income is tax free, second $850 is taxed at lowest rate.

Line 45:

The degree to which you can get out of the AMT if you owed it in 2006 will depend on what got you into that parallel tax system. If it's high state taxes, and you live in a high-tax state like California, New York, then maybe there's not a lot you can do about it.

But if you were pushed into AMT by, say, exercising stock options, and you've got more to exercise, you might want to spread out the exercise so you don't have a big AMT hit in one year.

If your entry into the AMT was aided by interest income from private-activity municipal bonds (the interest from which isn't tax-exempt under the AMT), consider shifting the types of investments you invest in.

Line 47:

If your mutual-fund holdings include international stocks, you can likely claim the foreign-tax credit. There's also an itemized deduction for foreign taxes paid, but it often makes more sense to take the credit. If your foreign taxes are less than $300 ($600 for a married couple filing jointly), you don't need to do anything other than enter the amount on this line.

Line 48:

See above Line 7.

Line 50:

Even if you paid tuition or other education expenses in 2006, income phaseouts on education credits might have forced you to leave this line blank.

Note that you could select the deduction for tuition and fees instead.

If your income is close to the phase-out limit (for single filers in 2007, the phaseout starts at AGI of $47,000, and the credits are eliminated after $57,000; $94,000 to $114,000 for joint filers) and you have some control over when you receive income, consider delaying income to the following year to take advantage of these credits, which can cut your tax bill by as much as $2,000. Also, high-income parents may be able to let their dependent student claim an education credit to reduce his or her own tax bill, if the parents waive the dependency exemption.

Line 51:

If your income is under the limit, you may claim this credit even if you contributed to only Roth IRA.

Line 52:

If you left Line 52 blank, now's the time to consider making some energy-efficient home improvements so you can claim a credit on your next tax return.

Line 77 is for your estimated tax penalty.

If you entered a big amount on the previous line ("amount you owe"), then you might have owed a penalty here. To avoid that penalty next time, pay 100% of the tax you owed last year; 110% for certain high earners. If you file a W-4, try the withholding calculator at www.irs.gov.