This time of year, now through the first quarter of next
year, you will see articles offering year-end tax planning
tips. Tax planning tips can increase income in future
years, so be careful. Many tax tips often involve
accelerating deductions, deferring income, or last-minute
charitable deductions (the first three following tips).
For example you may be compelled to make a large charitable
contribution this year by December 31st. However if you
could be in a higher tax bracket next year because your
income is going up because of a substantial raise or bonus,
you would have been better off to make the contribution
next year. Some may say this is heartless, but I say just
the reverse. If you pay less in taxes because of good
planning, your will be better off financially and able to
give more in the future.
If you have volatile income, before you use the tax savings
tips here and in other articles, you may want to run
projections for this year and next. A good accountant will
run these calculations for you, but understand that tax law
changes from year to year and from one administration to
the next can often make predicting tricky.
1. Defer income
If you are able to defer income, such as commissions and
bonuses until next year, you might be able to pay lower
income taxes this year. However, you must consider what
your income and taxes will be next year to be sure that you
are not actually increasing your taxes.
2. Accelerating deductions
Accelerating major deductions such as state income taxes,
property taxes, and mortgage interest may help anyone,
especially during a high-income year. If you don't think
your personal income tax bracket will be higher next year,
and you're not affected by the alternative minimum tax, you
can make state and/or local tax payments before the end of
this year so you can take a deduction this year.
3. Charitable Contributions
Consider making chartable deductions before the end of the
year to receive a deduction. You must make the contribution
by 12/31/2007.
Donate appreciated property such as real estate or stock
instead of the proceeds of the sale. You may be able to
receive a deduction for the value of the contribution
without paying tax on the growth portion resulting from a
sale, then a gift. If you intend to transfer appreciated
property, begin early since it will take several weeks to
make the change.
4. Alternative minimum tax traps
Many people face large AMT bills compared to previous
years. Be warned if you have larger than usual medical
expenses, non-federal income and real estate taxes, or
miscellaneous itemized deductions; or if you have exercised
large stock options, to name a few.
Year-end tax planning strategies can backfire under AMT. Be
very careful accelerating some deductions and exercising
stock options at year end. See a tax professional for
information on your specific tax situation.
5. Be careful when investing new money in mutual funds at
the end of the year
Call the mutual fund and find out when the distribution
date is. You may want to purchase after the distribution
date to avoid owing taxes on fund shares that you owned
only for a short period of time and had little to no gain.
6. Contribute the maximum to retirement accounts
Contribute the maximum allowable to employer-sponsored
defined contribution retirement plans, such as profit
sharing, 401(k), 403(b) and 457(b) plans. This not only
provides an excellent tax deduction, but it also helps you
to plan for your future retirement.
You may want to contribute to an IRA; up to $2,000 is fully
deductible if you did not participate in a
company-sponsored retirement plan or if your income falls
below certain levels.
If you are self-employed, you can contribute more to a
pension plan than into an IRA. You have until December 31
to set up the plan.
7. Investment Losses
If your investment portfolio has stock that has depreciated
in value and is worth less than when you originally
purchased it, you may want to consider selling it. You may
be able to use that loss to offset capital gains and
ordinary income.
Be careful though; investment decisions should not just be
for tax purposes. Make sure that you do your research
before selling any investment. Some people react too
quickly when investments lose value; others sometimes hold
on too long. If you decide to sell and invest in something
new, make sure that you examine your portfolio to ensure
that you have the right mix of investments to match your
investment profile, risk propensity and asset allocation
model.
8. Save for College
Consider contributing to your child's college savings into
a 529 plan. The contributions are not deductible on your
Federal return, but parents may be able to write off
contributions up to a certain dollar amount on their state
income tax return. Log on to SavingforCollege.com to find
out information about your state.
9. Home Improvements
Here is a great deal. How about saving energy and the
environment, lower utility bills, increase the value of
your home and save on taxes — all at once. Projects
for the home's shell (insulation, windows, sealing) and
heating and cooling may qualify for a one time tax credit
of $500. However you are running out of time, since they
must be in place by the end of 2007. So while crawling
around your attic looking for ornaments, think of adding
insulation. If you made home improvements over the last
couple of years, be sure to dig up your records; you may
already be eligible.
Before moving forward on one of these projects, make sure
that you get full information about these and other energy
efficient tax incentives from The Tax Incentives Assistance
Project at http://www.energytaxincentives.org/. There you
will find more information about Home Shell and Heating &
Cooling as well as Hybrid Passenger Vehicles and Solar
Energy Systems.
10. If self-employed, buy equipment and supplies
Have you been putting off buying needed business equipment
and supplies, or do you know that you will soon need them?
Now may be the time to invest in your business and save
taxes as well. Business tax can be complex; therefore it
may be wise to first call your accountant prior to large
purchases.
11. Give gifts to children
When you give to friends and family, it is usually not
taxable to the recipient or the giver. Many people do not
realize though if that gift exceeds $12,000 per person it
is taxable to the giver, and at a high rate. Therefore, if
you intend to give anyone more than that amount, you could
give some this year and some next. The second tip is that
you and your spouse can both give $12,000 per person,
doubling the amount not subject to tax. Be sure to consult
your legal and tax advisor prior to making all gifts.
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Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. eFinPLAN is the first and only web-based
comprehensive consumer financial planning software designed
for people who are trying to do a lot of their own
financial planning. Find out more about how do-your-self
financial planning and how to reach your goals at: =>
http://www.efinplan.com/
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