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March 26, 2008

For a pair of high-powered lawyers, Mr. and Mrs. Obama seem a bit careless about their tax planning. We can draw a money-saving lesson for your 2007 1040 from the Obamas' 2006 1040.

20080326-3.JPGSelf-employed taxpayers can take advantage of "Keogh" retirement plans and SEP plans. Keogh plans are simply ordinary retirement plans for a single self-employed taxpayer. A "SEP," or Simplified Employee Pension, is basically a special kind of deductible individual retirement account for a self-employed taxpayer (UPDATE: this means earnings on the accounts accumulate tax-free until they are withdrawn for returement).

While Keogh plans have to be set up before year-end to be effective, you can set up and fund a SEP as late as the due date of your return. The only documentation required is a Form 5305-SEP for your records and a deposit to your SEP account with your friendly community banker or broker by April 15 - or October 15, if you extend your 1040.

For 2007, you can save as much as 25% of your self-employment income (on up to $180,000 in income) in a SEP, for a maximum contribution of $45,000.

Mr. Obama had self-employment income $506,618, mostly from his book. Mrs. Obama had $51,200 of what appear to be directors fees from "Treehouse Foods," which is also self-employment income. With this income, the Obamas could have contributed $54,103 to SEP plans for 2006, reducing their taxes by about $17,661.

So keep hope alive! If you have self-employment income for 2007, you can still have the audacity to open a 2007 SEP. By moving money from one pocket to another, you can still make a dent in your 2007 taxes.

Link: The TaxProf rounds up coverage of the Obama 2006 returns here and here.

This is another in our series of 2008 filing season tips.

UPDATE from the comments: It looks like the Obamas aren't exactly model savers, tax-deferred or otherwise.

UPDATE II: More From Greg Mankiw.

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