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Year-End Tax Planning

While the average taxpayer will avoidpaying any more medical bills until 2006.
thinking about income taxes until theThe same concept applies for miscellaneous
approach of the April deadline forces him todeductions.If you expect to be able to
do so, once the ball drops on One Timesitemize, and you are making quarterly state
Square at midnight on December 31st and theestimated tax payments, make the 4th quarter
New Year is rung in there is very little thatpayment in December, instead of waiting until
can be done to cut your tax bill.However,the January 16, 2006 due date, so you will be
during the last two months of the year youable to deduct the payment on your 2005
can do a great deal to reduce your taxSchedule A.4) If you do not have the cash
liability.Sit down with paper and pencil andavailable to pay for the deductible items you
list your anticipated income for 2005 and allhave scheduled as part of your year-end plan,
your allowable deductions to date. What youyou can use a credit card to pay for the item
want to do is, using your 2004 return as aand still get a 2005 deduction. Allowable
guide, prepare a projected 2005 return. Onceexpenses charged to a credit card (VISA,
this is done you can decide what steps toMaster Card, American Express, Discover) are
take to make sure you pay the absolute leastdeductible in the year charged, and not in
amount of federal and state income taxthe year that you actually pay for the
possible for 2005 and 2006. Tax informationcharge.5) The option to deduct state and
for 2005 (i.e. standard deduction andlocal sales tax paid instead of state and
personal exemption amounts, tax rates, etc.)local income tax paid will expire on December
is available on the WHAT'S NEW FOR 2005 Page31, 2005. This option will not be available
at are some year-end tips:1) Traditionalfor 2006. If you are planning to buy a new
year-end planning calls for postponing thecar (other than a qualifying energy-saving
receipt of taxable income until 2006 andhybrid - see tip #6), SUV, motorcycle, or
accelerating allowable deductions to beother "big ticket" item in the near future
claimed in 2005, the idea being to reduceyou may want to do so before the end of the
your 2005 taxable income to a minimum. Thisyear to be able to deduct the sales tax.6)
strategy will generally apply if you expectThe Energy Tax Incentives Act of 2005 creates
to be in the same tax bracket for both 2005new tax credits for certain energy-saving
and 2006, or if you will be in a lowerautos, consumer products and home
bracket in 2006.If, however, you anticipate aimprovements beginning in 2006. You may want
substantial increase in taxable income into postpone any purchase of qualifying
2006, which will push you into a higherenergy-saving items until next year to be
bracket, you should do the reverse andable to claim the credit.7) While postponing
accelerate the receipt of taxable income toincome and accelerating deductions may reduce
2005 and postpone deductible expenses untilyour "regular" income tax for 2005, these
2006. Income received in 2005 will be taxedactions may backfire and end up costing you
at a lower rate, and deductions claimed inif you fall victim to the dreaded Alternative
2006 will yield a greater tax savings.NotMinimum Tax (AMT). Why? Because taxes and
sure what your 2006 income will be. Followmiscellaneous expenses are not deductible in
the rule of "when in doubt - defer" - go thecalculating AMT, and medical expenses are
traditional route and postpone income andonly deductible to the extent they exceed 10%
accelerate expenses.2) It does not pay toof AGI. When preparing your projected 2005
itemize unless the total of your allowablereturn be sure to determine if you will be
deductions exceeds the standard deductionsubject to AMT and plan your strategies
that applies to your filing status, plus anyaccordingly.8) When preparing your projected
additions for age or blindness. If youreturn you should review the performance of
decide to accelerate allowable deductions toyour investment portfolio for the year. Add
claim them in 2005, you can accelerate allup all your realized gains and losses from
you want, but it will be wasted unless youractual sales of stock, bonds and mutual fund
total "itemizable" deductions exceed yourshares for the first 10 months of the year,
applicable standard deduction.Let us say youwith separate net totals for short-term (held
usually do not have enough deductions toone year of less) and long-term (held more
itemize. However, after preparing yourthan one year) activity. Gains and losses
projected 2005 return you discover that,from inherited property are always considered
because of some special circumstance, youlong-term. Include in the long-term
will be able to itemize this year. Duringcalculation any "capital gain distributions"
the last two months of the year you shouldfrom mutual funds.Now do a similar
incur, and pay for, as many deductiblecalculation for unrealized "paper" gains and
expenses as possible.If, on the other hand,losses on the investments you still hold.
your projected return indicates that you doYou may want to sell some of your investments
not have anywhere near enough deductions tobefore the end of the year at a loss to wipe
be able to itemize, postpone making anyout year-to-date gains, or at a profit to
deductible payments until 2006. Making thesetake advantage of year-to-date losses in
payments in 2005 would not produce any taxexcess of $3,000.00.There are no written in
savings, while it is possible that bystone year-end tax planning rules that apply
deferring them until next year you may beto all taxpayers in all cases. As with any
able to itemize in 2006.3) The timing ofother transaction, year-end strategies must
deductions is especially important when itbe evaluated in the context of the special
comes to medical expenses and miscellaneousfacts and circumstances of your individual
job-related and investment expenses. You aresituation. You may want to review your
allowed to deduct medical expenses only toyear-end situation with your tax
the extent that they exceed 7 1/2% of yourprofessional.And remember - your first
Adjusted Gross Income (AGI), and mostcriteria for evaluating any financial
miscellaneous deductions are only deductibletransaction you are considering should always
to the extent that the total exceeds 2% ofbe economic. Taxes are second.Robert D Flach
AGI.If you anticipate a 2005 AGI ofis a tax professional with 34 tax seasons of
$70,000.00 you must exclude the firstexperience preparing 1040s for individuals in
$5,250.00 of medical expenses - the firstall walks of life. He writes THE WANDERING
$5,250.00 is not deductible. If your medicalTAX PRO weblog ( the NJ TAX PRACTICE BLOG (
expenses to date are close to or more thanand the website which has a wealth of tax
%5,250.00, and you will be able to itemize,planning and preparation advice and
pay any outstanding medical bills andinformation. He also writes and publishes
schedule, and pay for, check-ups, doctorTHE FLACH REPORT, a quarterly tax newsletter.
visits and needed dental work in November andFor more info on THE FLACH REPORT go to
December. If medical payments to date areThe above article is taken from postings to
substantially less than $5,250.00, put offTHE WANDERING TAX PRO.



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