Jewishguy
12-02-2005, 12:49 AM
WASHINGTON (Reuters) - Don't worry about those 24 shopping days until Christmas. It's the 31 check-writing days before New Year's that should concern you.
This monthlong period is like a gift on a platter for taxpayers. It's an opportunity to get in any deductible payment before 2005 closes and the only tax planning you have left is whether to hire H&R Block or use Turbotax.
Here's how to make the most of the month, tax wise.
-- Position yourself for the breaks that will disappear. After 2005, some tax deductions will expire without new Congressional action. That includes the $250-a-year deduction for teachers who use their own money to buy supplies for the kids. It also includes the ability to deduct state and local sales taxes in lieu of state and local income taxes.
That's a biggie for people who live in low-income tax states, or for retirees who may have low taxable income but are about to make a big purchases like a boat or a car. Buy them this year and make sure you don't lose the deduction.
-- Wait for the tax breaks that haven't arrived yet. Don't buy that weather-stripping for windows and doors or the hybrid car just yet. All those energy-efficiency expenses will start earning you tax credits if you wait until January.
-- Figure out if you're vulnerable to the alternative minimum tax. If your situation is similar to last year's, go back over your 2004 forms and see whether you fell into the AMT or were very close to the line.
You could be susceptible to the AMT if you have big cash out refinancings on your house or have borrowed more than $100,000 in your home equity line of credit, if you pay a lot in state and local taxes (no, it's not fair), if you have a lot of kids (right, not fair), or if you've exercised certain kinds of stock options in 2005. If you're an AMT candidate, do the reverse of standard year-end advice: You should defer those deductions until next year and bring a bit more income forward, if that's possible. That's because the AMT is calculated in a way that could hurt your bottom line if you have too many deductions relative to the level of your income.
-- Decide whether you are itemizing this year. If your itemized deductions come out very close to the standard deduction, many experts will tell you to itemize every other year and "bunch" your deductions into alternate years.
This year the standard deduction is $5,000 for singles and $10,000 for a married couple filing jointly. If your deductions aren't that high, don't bother.
If you know you'll have more than that in deductions, pile it on: Prepay one more mortgage payment; send off that property tax check, and write all the charity checks you've been thinking of. Make one more sweep of used books, clothes, tools and home furnishings that can be donated before year end.
-- Check your medical expenses and your miscellaneous deductions. You can't deduct medical expenses unless they top 7.5 percent of your adjusted gross income, and the same goes for miscellaneous deductions under 2 percent of your AGI. So bunch those. If you're medical expenses are nowhere near that 7.5 percent mark, put off the last dental check-up and eyeglass update until after the new year. If your miscellaneous deductions (work-related expenses, the safe-deposit box, investment fees, job hunting costs, etc. etc.) are pushing past the 2 percent mark, pile them on, too.
-- Review the Roth IRA. You have until next April 17 to decide if you want to open or fund a Roth IRA. But you'll have to decide before the end of the year if you want to convert some of your existing tax-deferred IRA into a Roth. That will cost you taxes in the year that you do it, but could reap thousands of dollars in savings down the road, as the money which the account earns is likely to remain tax-free into the future.
Some analysts tell their clients not to do this; they say that it never makes sense to pay taxes before you have to. But sometimes it does.
If you had extremely low income in 2005 and expect more in the future, it's a good time to convert. That's often the case with people in the first few years of their retirement. If you make too much, the government will protect you from yourself, and not even let you convert: You won't be eligible to make this conversion if your income is over $100,000. (Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com.)
This monthlong period is like a gift on a platter for taxpayers. It's an opportunity to get in any deductible payment before 2005 closes and the only tax planning you have left is whether to hire H&R Block or use Turbotax.
Here's how to make the most of the month, tax wise.
-- Position yourself for the breaks that will disappear. After 2005, some tax deductions will expire without new Congressional action. That includes the $250-a-year deduction for teachers who use their own money to buy supplies for the kids. It also includes the ability to deduct state and local sales taxes in lieu of state and local income taxes.
That's a biggie for people who live in low-income tax states, or for retirees who may have low taxable income but are about to make a big purchases like a boat or a car. Buy them this year and make sure you don't lose the deduction.
-- Wait for the tax breaks that haven't arrived yet. Don't buy that weather-stripping for windows and doors or the hybrid car just yet. All those energy-efficiency expenses will start earning you tax credits if you wait until January.
-- Figure out if you're vulnerable to the alternative minimum tax. If your situation is similar to last year's, go back over your 2004 forms and see whether you fell into the AMT or were very close to the line.
You could be susceptible to the AMT if you have big cash out refinancings on your house or have borrowed more than $100,000 in your home equity line of credit, if you pay a lot in state and local taxes (no, it's not fair), if you have a lot of kids (right, not fair), or if you've exercised certain kinds of stock options in 2005. If you're an AMT candidate, do the reverse of standard year-end advice: You should defer those deductions until next year and bring a bit more income forward, if that's possible. That's because the AMT is calculated in a way that could hurt your bottom line if you have too many deductions relative to the level of your income.
-- Decide whether you are itemizing this year. If your itemized deductions come out very close to the standard deduction, many experts will tell you to itemize every other year and "bunch" your deductions into alternate years.
This year the standard deduction is $5,000 for singles and $10,000 for a married couple filing jointly. If your deductions aren't that high, don't bother.
If you know you'll have more than that in deductions, pile it on: Prepay one more mortgage payment; send off that property tax check, and write all the charity checks you've been thinking of. Make one more sweep of used books, clothes, tools and home furnishings that can be donated before year end.
-- Check your medical expenses and your miscellaneous deductions. You can't deduct medical expenses unless they top 7.5 percent of your adjusted gross income, and the same goes for miscellaneous deductions under 2 percent of your AGI. So bunch those. If you're medical expenses are nowhere near that 7.5 percent mark, put off the last dental check-up and eyeglass update until after the new year. If your miscellaneous deductions (work-related expenses, the safe-deposit box, investment fees, job hunting costs, etc. etc.) are pushing past the 2 percent mark, pile them on, too.
-- Review the Roth IRA. You have until next April 17 to decide if you want to open or fund a Roth IRA. But you'll have to decide before the end of the year if you want to convert some of your existing tax-deferred IRA into a Roth. That will cost you taxes in the year that you do it, but could reap thousands of dollars in savings down the road, as the money which the account earns is likely to remain tax-free into the future.
Some analysts tell their clients not to do this; they say that it never makes sense to pay taxes before you have to. But sometimes it does.
If you had extremely low income in 2005 and expect more in the future, it's a good time to convert. That's often the case with people in the first few years of their retirement. If you make too much, the government will protect you from yourself, and not even let you convert: You won't be eligible to make this conversion if your income is over $100,000. (Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com.)