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Seven Top Tax-saving Ideas at Year-end
With the holidays fast approaching, now is a good time to figure out how to cut your 2005 tax bill. Although everyone's situation is different, here are seven popular year-end strategies for individuals and small-business owners to consider.
1. Charitable donations: As a general rule, the full amount of a cash donation is deductible on the donor's personal tax return. If a donation is made by credit card at year-end, the gift is deductible in 2005, even if the charge is not actually paid until next year. Added tax break: For donations of property, the full fair-market value is deductible if the property has been held for more than one year.
2. AMT liability: The alternative minimum tax (AMT) can sneak up on unsuspecting taxpayers. It applies if your AMT liability, based on a special tax computation involving "tax preference" items, exceeds your regular tax liability. Individual taxpayers should have their AMT liability calculated before year-end. Depending on the result, it may be advisable to shift tax preferences to next year to avoid or reduce AMT liability. Alternatively, you might accelerate income into 2005 if the AMT rate is lower than your top marginal tax rate.
3. Section 179 allowance: Under Section 179 of the tax code, you can elect to currently deduct some or all of the cost of business assets placed in service anytime this year. For 2005, the maximum Section 179 allowance, which was just $25,000 before the law was changed a few years back, has been increased to $105,000.
4. Estimated tax penalties: Even if you do not have enough federal income tax withheld during the year, you can avoid an estimated tax penalty by meeting one of two "safe harbor" exceptions. No penalty is imposed if annual tax payments equal 90% of the current year's liability or 100% of the prior year's tax liability. The percentage for the 100% safe harbor is increased to 110% if your adjusted gross income (AGI) for the prior year exceeded $150,000.
5. Medical and dental expenses: You may deduct unreimbursed medical and dental expenses to the extent the annual total exceeds 7.5% of your AGI. Try to bunch nonemergency expenses (e.g., new eyeglasses or dental cleanings) in the tax year that provides the best opportunity for a deduction. Note: Do not forget to include co-payments required under a company health insurance plan.
6. Wash sales: Under the "wash sale" rule, an investor cannot claim a loss if he or she buys back substantially identical securities within 30 days. To avoid this result, you can (1) wait at least 31 days to repurchase the securities or (2) buy replacement securities first and wait at least 30 days before selling the original shares. Note: This must be done more than 30 days before the end of the year to realize the loss in 2005.
7. Income shifting: You can reduce the overall family tax bill by shifting taxable income from your high tax bracket to other family members in lower tax brackets. For instance, you might transfer income-producing property to custodial accounts for your minor children. Caution: Be aware of the "kiddie tax." To the extent that the unearned income a child under age 14 exceeds an annual limit ($1,600 for 2005), the excess is taxed at the top marginal tax rate of the child's parents.
In summary: You may be able to use one or more of these techniques to reduce your 2005 tax bill. However, tax planning cannot be done in a vacuum. With the help of an expert tax-planning professional, you can have a year-end plan tailored to your personal circumstances.