Tax-Planning Strategies For The Rest Of 2005

Even with the year more than half gone, you still have time to save income taxes for 2005. The federal tax law provides many opportunities for taxpayers to cut their tax bills. All you need to do is identify and implement appropriate planning strategies.

Know Where You Stand Income-wise

Now is the time to get out your last pay stub and see how much income you’ve earned this year. Take a look, too, at your savings and investment statements and any other paperwork showing how much investment income you have earned. Then, estimate how much more salary, interest, dividends, and other income you might expect for this year. Add up the totals to see how your estimated 2005 income compares to last year’s total income. Use that comparison to estimate how much more or less income you are likely to have this year.

Itemized Deductions

If you expect to itemize your deductions on your 2005 return, think about paying deductible expenses before the end of the year to lower your 2005 taxes.

Deductible Interest. Consider making your January 2006 mortgage payment (which includes December’s interest) in late December 2005, so that the interest will be deductible on your 2005 return.

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5 percent of adjusted gross income for medical expenses and 2 percent of adjusted gross income for miscellaneous expenses. Bunching two years of your or your family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investment expenses) into one year may allow you to surpass the deduction floors and help you gain a deduction for part of your expenses.

Charitable Contributions. If you are planning to make a charitable donation in early 2006, consider a 2005 year-end donation instead. Contributions charged on your credit card in 2005 count as 2005 deductions, even if you don’t receive or pay the credit card bill until 2006.

Taxes. If you pay quarterly estimated state income taxes, consider paying your last 2005 estimate before December 31, so that it will be deductible on this year’s tax return. Employees who have state income taxes withheld from their pay may wish to increase the amount withheld from their remaining 2005 paychecks to cover any projected underpayment.

However, if you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2006, accelerating these payments into 2005 may not be your best course of action. In addition, if you claim high deductions in 2005, you may be subject to the alternative minimum tax. See us for more details.

Tax Deferral

Review any opportunities you may have to push taxable income into a later tax year. Deferral strategies are especially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2005 taxes:

• Ask your employer to defer paying your 2005 year-end bonus until early 2006.
• Maximize 2005 contributions to any tax-deferred retirement savings plan in which you participate, such as a 401(k) plan or a 403(b) tax-sheltered annuity.
• If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2005 customer billings so that payment won’t be received until 2006.

Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE plan. We would be happy to discuss the advantages and restrictions of each type.

Business Tax Breaks

Make sure to take full advantage of the business growth incentives that the tax law gives you.

Included among these provisions is the ability to write off up to $105,000 of the cost of qualifying business assets in the year of purchase (rather than depreciating the assets over time). And, if your business is involved in manufacturing or other “production activities” (which include such diverse activities as qualified property leasing, U.S. construction and architectural services, and qualified movie or TV film production), your company may be entitled to a deduction for a percentage of its business income from those activities. See us to learn about the requirements you need to meet to take advantage of these tax breaks.

Investment Strategies

Do you have any investments with paper losses? If you are thinking about selling any of your poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized. Any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments you have “paper gains” on before year-end to absorb any capital losses that exceed $3,000 per year. If this is not desirable, any unused capital losses may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rate on 2005 qualifying dividends and net long-term capital gains is 15 percent. Ordinary income tax rates range as high as 35 percent.

Of course, taxes are just one factor to consider in making an investment decision. Please contact us for help evaluating the tax effect of any proposed transaction.

Can We Help?

We’re ready to provide you with personal and business year-end tax planning assistance. Call us for an appointment to review your specific situation. Note that, the general information in this publication is not intended to be nor should it be treated as tax advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, you should seek advice from your tax advisor based on your particular circumstances before acting on any information presented.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.