Digging in on tax preparation now can save you plenty of money and time come April. To reap the most benefits, you'll need to act quickly — these strategies won't be of any use after Dec. 31.
November 14, 2006 (Press Release) --
We know there are plenty of other things on your mind this time of year, but digging in on tax preparation now can save you plenty of money and time come April. To reap the most benefits, you'll need to act quickly — these strategies won't be of any use after Dec. 31:
Be more energy efficient
Consumers eager to spend a little less on their energy bills are in luck. The government wants to help — with a tax credit of up to $500 per home for select energy-efficiency measures put into place in 2006 or 2007. Install a new hot-water boiler, for example, and you can claim a credit for up to $150 of the purchase price. You can split the credit over both years, and among several projects. Consider squeezing in a little project before year's end, and plan now for a major renovation next year, say, replacing your roof (10% of the cost, up to $500).
Sick of that gas-guzzling SUV? You can also claim a tax credit for the purchase a hybrid vehicle. How much you qualify for will depend on the model you choose — and how soon you buy. (The IRS determines the credit for each vehicle. Theoretically, you can claim a credit worth up to $3,400; however, the highest credit currently available is $2,600 for a 2005, 2006, or 2007 Ford Escape Hybrid.) The credit begins to phase out after a manufacturer has sold 60,000 vehicles. As of Oct. 1, Toyota has already begun phasing out its credits. At the beginning of 2006, a Toyota Prius was eligible for a credit of $3,150; today, a consumer can only claim half that, $1,575. Depending on where you live, you may also qualify for a state tax credit when you purchase a hybrid. Consumers in South Carolina, for example, can take a credit worth 20% of the federal tax credit.
Cut your (investment) losses
Take a long, hard look at your portfolio — investment losses can be a powerful tool for reducing your tax bill. "Ideally, you want to harvest enough losses to offset your capital gains for the year, plus another $3,000," says Tom Ochsenschlager, vice president of tax for the American Institute of Certified Public Accountants.
You can also offset capital gains by donating appreciated stock to charity, notes Ochsenschlager. "The deduction is fair-market value, and you don't have to report the gains," he says. "Financially, that's a lot better than selling securities, paying the capital gains tax and then making that charitable contribution."
Manipulate your income
Why pay tax this year that you can put off until next year? You can easily adjust your income for 2006, says Benjamin Tobias, a financial planner and accountant who founded Tobias Financial Advisors in Plantation, Fla. "You want to put as many deductible expenses into 2006 as possible to reduce your taxable income," he says. Likewise, you want to defer as much income to 2007 as possible.
Before you execute this slick move, consider how increasing your adjusted gross income next year will in turn affect your other tax-planning strategies. A higher adjusted gross income (AGI) might, for example, reduce your ability to make deductible IRA contributions, or affect your eligibility to deduct interest paid on student loans. Got a little wiggle room? Here are a few ways to reduce this year's income:
Prepay a few bills.
Mail out your January mortgage payment before the end of December, and you can include another month's worth of deductible mortgage interest in your 2006 returns, says Jackie Perlman, senior tax research coordinator for H&R Block. Other opportunities to prepay include real-estate property taxes, quarterly-estimated state income taxes and educational tuition and fees, all of which can be claimed as itemized deductions. (If your state allows it, she says, you can also deduct contributions to a 529 college savings plan to be used next year.)
Postpone billing.
Hold off pressing for that bonus, freelance income or other irregular payments until January. Even if a project was completed this year, it's not officially income until you have that check in hand.
Switch up your debt.
Consider taking out a home equity loan or line of credit to pay off that high-interest credit-card debt before year's end, suggests Tobias. Interest paid on home equity debt is deductible up to $100,000, so you can eke out another itemized deduction. And rates are significantly lower than the average credit card interest rate of 13.08% fixed (14.79% variable) — the going rate for a $30,000 HELOC is 8.88%; 9.99% for a HEL, according to HSH Associates, a real-estate information firm.
Give to charity.
Increase your donations this year with an eye to tax savings. Thinking more long term? If you have at least $10,000 that you'd like to give to charity someday, consider setting up a donor-advised fund. These accounts let you deduct the whole amount now, and invest the funds to be dispersed over time.
Increase your 401(k) contribution.
"Depending on how your plan is written, you may be able to make a catch-up contribution," says Perlman. Increasing your contributions for the last few pay periods of the year lets you simultaneously sock away a little more for retirement and cut your taxes. Saving an additional $1,000 amounts to tax savings of $280 for someone in the 28% tax bracket.
Keep an eye on the AMT
An estimated 3.4 million taxpayers will be hit with the alternative minimum tax this year. If you're likely to be among them, talk to your tax preparer before using any of the tried-and-true strategies mentioned above, advises Mark Luscombe, principal tax analyst for CCH, a trade publisher. "AMT people need to be a little careful," he says. When manipulating income, for example, someone paying under the AMT should move more into 2006 to avoid getting hit with the AMT again in 2007.
Maximize next year's pretax benefits
Enough about tax year 2006. Now is also the time to set in motion some tax strategies to keep your bill down in years to come — namely, by taking advantage of all the pretax benefits your employer asks you to elect during open-enrollment season. "There's no reason not to," says Sara Taylor, annual enrollment leader for Hewitt Associates, a benefits-consulting firm. "It's just a lost opportunity." In addition to determining your 401(k) contribution, look into flexible spending accounts for out-of-pocket medical costs and dependent care, and pretax accounts for transit costs.
Author: Kelli B.Grant
Source: http://foxnews.smartmoney.com/
Be more energy efficient
Consumers eager to spend a little less on their energy bills are in luck. The government wants to help — with a tax credit of up to $500 per home for select energy-efficiency measures put into place in 2006 or 2007. Install a new hot-water boiler, for example, and you can claim a credit for up to $150 of the purchase price. You can split the credit over both years, and among several projects. Consider squeezing in a little project before year's end, and plan now for a major renovation next year, say, replacing your roof (10% of the cost, up to $500).
Sick of that gas-guzzling SUV? You can also claim a tax credit for the purchase a hybrid vehicle. How much you qualify for will depend on the model you choose — and how soon you buy. (The IRS determines the credit for each vehicle. Theoretically, you can claim a credit worth up to $3,400; however, the highest credit currently available is $2,600 for a 2005, 2006, or 2007 Ford Escape Hybrid.) The credit begins to phase out after a manufacturer has sold 60,000 vehicles. As of Oct. 1, Toyota has already begun phasing out its credits. At the beginning of 2006, a Toyota Prius was eligible for a credit of $3,150; today, a consumer can only claim half that, $1,575. Depending on where you live, you may also qualify for a state tax credit when you purchase a hybrid. Consumers in South Carolina, for example, can take a credit worth 20% of the federal tax credit.
Cut your (investment) losses
Take a long, hard look at your portfolio — investment losses can be a powerful tool for reducing your tax bill. "Ideally, you want to harvest enough losses to offset your capital gains for the year, plus another $3,000," says Tom Ochsenschlager, vice president of tax for the American Institute of Certified Public Accountants.
You can also offset capital gains by donating appreciated stock to charity, notes Ochsenschlager. "The deduction is fair-market value, and you don't have to report the gains," he says. "Financially, that's a lot better than selling securities, paying the capital gains tax and then making that charitable contribution."
Manipulate your income
Why pay tax this year that you can put off until next year? You can easily adjust your income for 2006, says Benjamin Tobias, a financial planner and accountant who founded Tobias Financial Advisors in Plantation, Fla. "You want to put as many deductible expenses into 2006 as possible to reduce your taxable income," he says. Likewise, you want to defer as much income to 2007 as possible.
Before you execute this slick move, consider how increasing your adjusted gross income next year will in turn affect your other tax-planning strategies. A higher adjusted gross income (AGI) might, for example, reduce your ability to make deductible IRA contributions, or affect your eligibility to deduct interest paid on student loans. Got a little wiggle room? Here are a few ways to reduce this year's income:
Prepay a few bills.
Mail out your January mortgage payment before the end of December, and you can include another month's worth of deductible mortgage interest in your 2006 returns, says Jackie Perlman, senior tax research coordinator for H&R Block. Other opportunities to prepay include real-estate property taxes, quarterly-estimated state income taxes and educational tuition and fees, all of which can be claimed as itemized deductions. (If your state allows it, she says, you can also deduct contributions to a 529 college savings plan to be used next year.)
Postpone billing.
Hold off pressing for that bonus, freelance income or other irregular payments until January. Even if a project was completed this year, it's not officially income until you have that check in hand.
Switch up your debt.
Consider taking out a home equity loan or line of credit to pay off that high-interest credit-card debt before year's end, suggests Tobias. Interest paid on home equity debt is deductible up to $100,000, so you can eke out another itemized deduction. And rates are significantly lower than the average credit card interest rate of 13.08% fixed (14.79% variable) — the going rate for a $30,000 HELOC is 8.88%; 9.99% for a HEL, according to HSH Associates, a real-estate information firm.
Give to charity.
Increase your donations this year with an eye to tax savings. Thinking more long term? If you have at least $10,000 that you'd like to give to charity someday, consider setting up a donor-advised fund. These accounts let you deduct the whole amount now, and invest the funds to be dispersed over time.
Increase your 401(k) contribution.
"Depending on how your plan is written, you may be able to make a catch-up contribution," says Perlman. Increasing your contributions for the last few pay periods of the year lets you simultaneously sock away a little more for retirement and cut your taxes. Saving an additional $1,000 amounts to tax savings of $280 for someone in the 28% tax bracket.
Keep an eye on the AMT
An estimated 3.4 million taxpayers will be hit with the alternative minimum tax this year. If you're likely to be among them, talk to your tax preparer before using any of the tried-and-true strategies mentioned above, advises Mark Luscombe, principal tax analyst for CCH, a trade publisher. "AMT people need to be a little careful," he says. When manipulating income, for example, someone paying under the AMT should move more into 2006 to avoid getting hit with the AMT again in 2007.
Maximize next year's pretax benefits
Enough about tax year 2006. Now is also the time to set in motion some tax strategies to keep your bill down in years to come — namely, by taking advantage of all the pretax benefits your employer asks you to elect during open-enrollment season. "There's no reason not to," says Sara Taylor, annual enrollment leader for Hewitt Associates, a benefits-consulting firm. "It's just a lost opportunity." In addition to determining your 401(k) contribution, look into flexible spending accounts for out-of-pocket medical costs and dependent care, and pretax accounts for transit costs.
Author: Kelli B.Grant
Source: http://foxnews.smartmoney.com/
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