November 20, 2007 12:00 am

Year-End On-the-Job Tax Moves

As December comes to a close, so too do the possibilities for cutting your 2007 tax bill and planning ahead for 2008 for job-related benefits. Take time to assess your current selections and how to use your W-2 to shrink what is due on your 1040.

Use up employee benefits for 2007

Don't waste your tax-advantaged pay from your job. Consider:

  • Taking vacation days if you cannot cash them out or carry them over to 2008.
  • Using up funds in your flexible spending account (FSA). If you have a medical FSA, spend down whatever remains in the account; if you don't, you'll lose the money. Suggestions: Stock up on over-the-counter medications (they are usually covered by an FSA) or a first aid kit. Buy an extra pair of prescription glasses or sunglasses. Note: Check whether you have an extended time (up to March 15, 2008) to use up your 2007 FSA contributions.

Handling year-end pay

You may receive a holiday gift or year-end bonus from your employer. Understand that most payments, including gift cards and merchandise of more than nominal value, are taxable to you.

Exceptions: You are not taxed on small gifts from your employer, such as a holiday turkey or ham. You are not taxed on gifts you receive from coworkers in a Secret Santa swap.

Adjust withholding and estimated tax payment

Review your tax picture to date as best you can-your income, expenses, and the tax payments you've made. If you think you have underpaid your taxes, ask your employer to increase withholding (the added tax can come out of a bonus check).

Alternatively, consider increasing the final estimated tax payment for the year (due on January 15, 2008).

Or, if you project that you've overpaid your taxes, ask your employer to reduce withholding and/or cut your final estimated tax payment.

Make benefit selections for the coming year

If your employer offers you a menu of benefit options, decide now what selections you want to make. If you let the window of time for making your choices close, you may not be able to make adjustments (except in limited circumstances). Pay attention to:

  • 401(k) contributions. Your company may have automatic contributions where part of your salary is added to your 401(k) account. If you don't want the automatic amount (usually 3% of your wages up to set limits), you can increase it (within limits), reduce it, or opt out entirely. Note: It's generally not a good idea to opt out; consider making the contribution that will entitle you to the maximum employer contribution (a way to obtain "free money" from the company).

Also decide on your investment selections. The plan may have default investments for your contributions if you fail to choose otherwise.

  • Health plan options. Determine what you can choose and what it will cost you.
  • FSAs. Determine how much to commit of your wages to pay for medical costs on a pretax basis through a company-sponsored medical FSA (the company usually sets an upper limit, but you can add a lesser amount). Remember: As explained above, add only what you think you'll spend for the year. If you fail to use it, you lose it!

If the company offers an FSA for dependent care costs, also decide now what you think you will need for 2008 so you don't overspend your pay on this account.

Tax Glossary

Revenue ruling

A revenue ruling is the Commissioner’s “official interpretation of the interpretation of the law” and generally is binding on revenue agents and other IRS officials. Taxpayers generally may rely on published revenue rulings in determining the tax treatment of their own transactions that arise out of similar facts and circumstances.

More terms