Bad Refunds and Worse AMTs

April 17 has come and gone and you've probably had enough of tax season.

But don't put those tax files away just yet. Now's the time to begin planning for your 2007 tax return.

"One of my favorite quotes is, 'Only turkeys do tax planning after Thanksgiving,' " said Paul Mueller, the chief executive and managing director of the District office of UHY Advisors, a tax and business consulting company. "You now have another eight and half months of the tax year left. Do some tax planning while everything is fresh in your mind."

If you got a lot of money back from the Internal Revenue Service, you might want to make some changes for 2007, Mueller said. "A lot of people think it's good news to get a refund," he said. "What it really means is you made an interest-free loan to the government."

The IRS reports that the average refund as of April 6 was $2,366, up 3.3 percent from last year's $2,290.

Certain events, such as purchasing a home, having a baby or getting married, can change your tax situation, resulting in a larger-than-expected return. However, if year after year you're getting $2,000 or more in refunds, you need to change the withholding allowances on your W-4 form, said Mueller, who is also the national director for tax services for UHY.

If you receive a salary, you can decrease the amount of taxes withheld from your pay by changing the number of allowances on your W-4 form. The allowances are based on the itemized tax deductions you can take. Those deductions might include mortgage interest, charitable gifts or deductible medical expenses. The number of allowances may be different from the number of exemptions you claim on your tax return.

Using your 2006 tax return, go through the worksheet on the W-4 to figure out how many personal allowances to take. You can also use the IRS withholding calculator at http://www.irs.gov.

If you're intimidated by the worksheet, at the very least increase your allowances by one or two, Mueller said.

"That will increase your net paycheck but probably not enough to throw you into a situation where you owe next April," he said.

Higher-income taxpayers should also use their current tax return to examine their potential exposure to the alternative minimum tax (AMT) liability for 2007, recommends John Nersesian, managing director of Nuveen Investments based in Chicago.

"The AMT continues to impact a growing number of taxpayers, triggered by preference items including state income taxes, property taxes, itemized deductions and personal exemptions, which are all added back in the AMT calculation," Nersesian said.