Year-End Tax Planning

While the average taxpayer will avoid thinking aboutconcept applies for miscellaneous deductions.If you
income taxes until the approach of the April deadlineexpect to be able to itemize, and you are making
forces him to do so, once the ball drops on One Timesquarterly state estimated tax payments, make the 4th
Square at midnight on December 31st and the Newquarter payment in December, instead of waiting until
Year is rung in there is very little that can be done tothe January 16, 2006 due date, so you will be able to
cut your tax bill.However, during the last two months ofdeduct the payment on your 2005 Schedule A.4) If
the year you can do a great deal to reduce your taxyou do not have the cash available to pay for the
liability.Sit down with paper and pencil and list yourdeductible items you have scheduled as part of your
anticipated income for 2005 and all your allowableyear-end plan, you can use a credit card to pay for
deductions to date. What you want to do is, using yourthe item and still get a 2005 deduction. Allowable
2004 return as a guide, prepare a projected 2005expenses charged to a credit card (VISA, Master
return. Once this is done you can decide what steps toCard, American Express, Discover) are deductible in
take to make sure you pay the absolute least amountthe year charged, and not in the year that you actually
of federal and state income tax possible for 2005 andpay for the charge.5) The option to deduct state and
2006. Tax information for 2005 (i.e. standard deductionlocal sales tax paid instead of state and local income
and personal exemption amounts, tax rates, etc.) istax paid will expire on December 31, 2005. This option
available on the WHAT'S NEW FOR 2005 Page atwill not be available for 2006. If you are planning to buy
are some year-end tips:1) Traditional year-end planninga new car (other than a qualifying energy-saving hybrid
calls for postponing the receipt of taxable income until- see tip #6), SUV, motorcycle, or other "big ticket" item
2006 and accelerating allowable deductions to bein the near future you may want to do so before the
claimed in 2005, the idea being to reduce your 2005end of the year to be able to deduct the sales tax.6)
taxable income to a minimum. This strategy willThe Energy Tax Incentives Act of 2005 creates new
generally apply if you expect to be in the same taxtax credits for certain energy-saving autos, consumer
bracket for both 2005 and 2006, or if you will be in aproducts and home improvements beginning in 2006.
lower bracket in 2006.If, however, you anticipate aYou may want to postpone any purchase of qualifying
substantial increase in taxable income in 2006, whichenergy-saving items until next year to be able to claim
will push you into a higher bracket, you should do thethe credit.7) While postponing income and accelerating
reverse and accelerate the receipt of taxable incomedeductions may reduce your "regular" income tax for
to 2005 and postpone deductible expenses until 2006.2005, these actions may backfire and end up costing
Income received in 2005 will be taxed at a lower rate,you if you fall victim to the dreaded Alternative
and deductions claimed in 2006 will yield a greater taxMinimum Tax (AMT). Why? Because taxes and
savings.Not sure what your 2006 income will be. Followmiscellaneous expenses are not deductible in
the rule of "when in doubt - defer" - go the traditionalcalculating AMT, and medical expenses are only
route and postpone income and acceleratedeductible to the extent they exceed 10% of AGI.
expenses.2) It does not pay to itemize unless the totalWhen preparing your projected 2005 return be sure to
of your allowable deductions exceeds the standarddetermine if you will be subject to AMT and plan your
deduction that applies to your filing status, plus anystrategies accordingly.8) When preparing your
additions for age or blindness. If you decide toprojected return you should review the performance
accelerate allowable deductions to claim them in 2005,of your investment portfolio for the year. Add up all
you can accelerate all you want, but it will be wastedyour realized gains and losses from actual sales of
unless your total "itemizable" deductions exceed yourstock, bonds and mutual fund shares for the first 10
applicable standard deduction.Let us say you usually domonths of the year, with separate net totals for
not have enough deductions to itemize. However, aftershort-term (held one year of less) and long-term (held
preparing your projected 2005 return you discovermore than one year) activity. Gains and losses from
that, because of some special circumstance, you willinherited property are always considered long-term.
be able to itemize this year. During the last two monthsInclude in the long-term calculation any "capital gain
of the year you should incur, and pay for, as manydistributions" from mutual funds.Now do a similar
deductible expenses as possible.If, on the other hand,calculation for unrealized "paper" gains and losses on
your projected return indicates that you do not havethe investments you still hold. You may want to sell
anywhere near enough deductions to be able tosome of your investments before the end of the year
itemize, postpone making any deductible payments untilat a loss to wipe out year-to-date gains, or at a profit
2006. Making these payments in 2005 would notto take advantage of year-to-date losses in excess of
produce any tax savings, while it is possible that by$3,000.00.There are no written in stone year-end tax
deferring them until next year you may be able toplanning rules that apply to all taxpayers in all cases.
itemize in 2006.3) The timing of deductions is especiallyAs with any other transaction, year-end strategies
important when it comes to medical expenses andmust be evaluated in the context of the special facts
miscellaneous job-related and investment expenses.and circumstances of your individual situation. You may
You are allowed to deduct medical expenses only towant to review your year-end situation with your tax
the extent that they exceed 7 1/2% of your Adjustedprofessional.And remember - your first criteria for
Gross Income (AGI), and most miscellaneousevaluating any financial transaction you are considering
deductions are only deductible to the extent that theshould always be economic. Taxes are second.Robert
total exceeds 2% of AGI.If you anticipate a 2005 AGID Flach is a tax professional with 34 tax seasons of
of $70,000.00 you must exclude the first $5,250.00 ofexperience preparing 1040s for individuals in all walks
medical expenses - the first $5,250.00 is not deductible.of life. He writes THE WANDERING TAX PRO
If your medical expenses to date are close to or moreweblog ( the NJ TAX PRACTICE BLOG ( and the
than %5,250.00, and you will be able to itemize, paywebsite which has a wealth of tax planning and
any outstanding medical bills and schedule, and pay for,preparation advice and information. He also writes and
check-ups, doctor visits and needed dental work inpublishes THE FLACH REPORT, a quarterly tax
November and December. If medical payments tonewsletter. For more info on THE FLACH REPORT
date are substantially less than $5,250.00, put offgo to The above article is taken from postings to THE
paying any more medical bills until 2006. The sameWANDERING TAX PRO.