Year-End Tax Tips
By Kristi Vaughan
‘Tis the season ... for thinking about taxes. For as long as there are days left in the calendar year there are still steps you can take to reduce your tax bite. And there certainly are things you can do to better prepare for next year’s tax bill!
Know tax law changes
Start your tax planning by reviewing tax law changes that might affect you. If you were in the military, itemize deductions, drive an SUV or converted rental property to a principal residence you could be affected by 2004 tax law changes.
- Military personnel - Military personnel who are eligible for the child tax credit or the earned income tax credit might get larger credits because of changes in the treatment of combat pay. The IRS now allows combat pay to be counted as income when figuring the child tax credit. Additionally taxpayers can choose whether they want combat pay included or excluded in income when figuring the earned income tax credit.
- Sales tax vs. income tax - Taxpayers who itemize deductions now can choose between deducting state and local sales tax or income tax.
- SUVs - As of Oct. 23, 2004, businesses can take a maximum first year deduction of $25,000 for certain SUVs. This limit was lowered from $100,000 for SUVs placed in service on Oct. 22, 2004 or earlier.
- Property sales - Taxpayers who convert rental property into a principal residence now must use that house as a principal residence for five years or more to get a capital gains exclusion on sale of the property.
As you look for tax savings, do a complete analysis of income and expenses for the year now concluding and a projection for the year ahead. Doing so can help you determine whether what seems to be a tax saving move really is or if it will create a bigger problem next year.
One area that has affected even middle income taxpayers in recent years is the alterative minimum tax or AMT. This tax was originally designed to ensure wealthy people paid their fair share of taxes but sometimes also gets middle class taxpayers, especially if they exercise incentive stock options.
Tried and true tax tips
With those caveats, the following are tax tips that generally are worth investigating:
- Defer income
- Increase expenses by taking last minute deductions
- Sell losing stocks and bonds to offset gains
- Sell losing mutual fund shares before distribution
- Max out your retirement contributions
- Investigating Roth IRAs
- Take minimum IRA distributions, if eligible
- Sign up for flexible spending accounts
