8 Year-End Tax Moves You Can’t Afford to Miss

Posted on 27. Nov, 2006 by in Taxes

It’s that time again. No, I’m not talking about getting up at 4am for the Black Friday specials. It’s time to start seriously thinking about your tax situation and how to squeeze in those last-minute deductions before New Years. Here are 8 tax moves that I think everyone should consider – and take advantage of:

  1. Max Out That 401(k)! – This is one option many people forget about when trying to shield your hard-earned cash from Uncle Sam. The maximum contribution that you can make this year is $15,000. So now’s the time to increase your contribution percentage to make up the difference. (Big year-end bonuses are also a great way to make up this difference). Oh, and if you’re over 50 you can stash another $5k in “catch-up” money in your 401k – bringing your yearly total to $20,000.
  2. Become Energy Efficient – You can now claim up to $2,000 for installing solar water-heating equipment in your home. You can also claim a credit of up to $500 for making tax_planning_checklist.gif various energy-saving improvements such as energy-efficient heat pumps, air conditioning, insulation materials, and exterior windows and doors. So if you’ve been considering becoming green or your home just needs a little winterizing – make sure that your home improvements are tax deductible. You’re local home improvement store should be able to tell you which products qualify for the deduction.
  3. Give a Little – Now is the time to think about maxing out your charitible contributions. If you’ve held appreciated stock for more than one year, consider donating those shares, rather than making similar cash donations. You’ll avoid paying taxes on the stock appreciation but can claim the full fair market value of the stock as a charitable deduction. Also, if you’re close to getting the maximum benefit from your charitible contributions, or if you are close to the standard deduction, consider shifting next years’ charitable contributions into this year. There’s nothing wrong with giving twice as much this year in order to take advantage of itemizing deductions, for example. Be aware, however, that new rules require they be in “good” condition or better to qualify for a deduction — even through the IRS has yet to define what that means. Non-cash donations worth $500 or more now require an appraisal. Previously, only items worth $5,000 and up had to be appraised to qualify for a charitable deduction.
  4. Buying a Car Soon? – If you’re thinking about buying a new car in the next few months, consider buying a hybrid or alternative-fuel vehicle and you could walk away with a tax credit of up to $3,400!
  5. Get a Checkup – If you have chosen your employer’s Flexible Spending Account, maximizing the amount you put into it will generally allow you to decrease your taxable income while simultaneously paying for otherwise non-deductible expenses. And with the new “grace rules,” an FSA is much less of a “use it or lose it” proposition.
  6. Review Your Investments – Fool.com says, “sart by figuring how your trades so far in 2006 stack up in your taxable accounts. Do you have a gain or a loss for the year? Now, tote up your paper gains and losses on investments you still own in taxable accounts. If trades so far show a net gain, maybe the prospect of sheltering that profit from the taxman is the impetus you need to cull a stumbling investment from your portfolio. Dumping an investment that shows a loss will not only save on taxes, but also give you the opportunity to reinvest the proceeds of the sale in a better performer. If trades so far (and any carryover loss from 2005) show a loss, you have the opportunity to take some profit tax-free. Is it time to take some money off the table by selling some top performers to rebalance your portfolio?”
  7. Pull Out the Calculator – The AMT, reports Kiplingers, is a parallel tax system with its own set of rules, does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or items such as investment expenses. Nor does it allow personal exemptions-worth $3,300 this year-for yourself, your spouse or your children.

    Essentially, you have to figure your taxes under two sets of rules — the regular tax code and the AMT — and pay whichever is higher. Regular tax brackets are indexed for inflation but the AMT isn’t. Consequently, your chance of being trapped by the AMT increases each year, particularly if you claimed large deductions for state income taxes or property taxes or have a large family. The bottom line though is that you’ll have to crunch some numbers towards the end of the year to see what the consequences of your financial decisions are going to be under AMT circumstances. You could find out that what you thought was a wise tax move actually pushed you into the pit of dispair AMT.

  8. Harness the Power of Losses – Fool.com recommends that if you decide to rebalance your portfolio before the end of the year, or if you simply decide to sell some shares at a profit, don’t forget the pent-up power of your capital losses. If you find that you have more losses than gains, you can deduct as much as $3,000 of those losses in one year. You’ll have to carry forward any losses in excess of $3,000 against future gains or future ordinary income. But don’t overlook the wash sale rule, which requires you to defer your loss if you purchase a “substantially identical” security within the period beginning 30 days before and ending 30 days after the date of the loss sale.

These represent just a few tax moves that you should consider as the new year approaches. However, this is also a good time to start planning for next years’ taxes. This includes looking at your investment portfolio, retirement contribution percentages, and all sorts of other good stuff that you can maximize next year if you start early.

One Response to “8 Year-End Tax Moves You Can’t Afford to Miss”

  1. allan branch

    28. Nov, 2006

    Because your job title isn’t “Accountant”!
    Mark Jan 1st 2007 on your calendar, make a sticky note, set it up in iCal. Lets face it, every piece of accounting software functions like a clumsy toddler trying to walk. Bloated, over-built and for the small business owner, a complete waste of time.

    Your job title isn’t Accountant, so why do you waste valuable hours every month trying to be an accountant? Is it because your Accountant charged you 1500 dollars last year to sort through the box of receipts you gave him?

    LessAccounting.com is developed by 3 individuals who believe less is better and more usually wastes time. Their goal is to bring you, the small business owner, the solution that will save you time, money and take the hassle from bookkeeping.

    LessAccounting.com is now taking applications to be apart of the private, 50-person, beta test. Each beta tester is hand selected because of his or her skill set. “We are looking for quality feedback from our target audience. We want to make it easy for them, not us.” says Steven A Bristol Co-Founder of LessAccounting.com.

    LessAccounting didn’t disclose any specific site functionality but did disclose a full launch on Jan 1st 2007 (or as soon as it’s ready). Private beta testing to start ASAP.

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