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Seven Tax Moves for the Summer

Now that you have filed your 2005 tax return, you can relax for another year. Right? Wrong. Tax planning has become a year-round proposition. And the tax-planning moves you make—or don't make—over the summer can have a substantial impact on your 2006 tax bill.

Keeping that in mind, here are seven common tax strategies to consider.

1. Examine estimated taxes. Life changes that occur during the year—a new marriage, a divorce, a new baby, a child's marriage, etc.—may affect your tax picture for 2006. If your tax payments so far this year are too low, you will have to write out a substantial check when you file your return. And you may owe an estimated tax penalty to boot. You can make up a tax shortfall through estimated tax payments or increase withholding from your paycheck for the rest of the year.

2. Avoid the “wash sale” rule. Under the wash sale rule, you cannot deduct a loss from the sale of a security if you acquire a substantially identical security within 30 days of the sale. To avoid this result, wait at least 31 days before you buy back the same security you sold at a loss. If you want to lock in your current position for a particular stock but still protect your loss, “double up” by buying the stock now and waiting at least 31 days to sell the original shares. Note: If a stock loss is disallowed due to the wash sale rule, at least you can subtract it from your basis in the stock.

3. Position investments for tax deferral. Now is a good time to review your portfolio and shift some money into investments with which you can postpone income until 2007. For example, you may want to consider Treasury bills, certificates of deposit (CDs) and other short-term investments that will not mature until next year. As a general rule, the income isn't taxable until the year it is received.

4. Salvage dependency exemptions. Although the rules for dependency exemptions have been modified, the basic thrust is still the same. You can generally claim a dependency exemption for a relative if you provide more than half of the relative's support and he or she does not have gross income exceeding the personal exemption amount ($3,300 for 2006).

The “gross income” requirement does not apply to a child who is under age 19 or a full-time student under age 24. If your child is graduating this year, make sure you pass the half-support test to ensure the exemption for 2006.

5. Set up a SIMPLE or a SEP. If you are self-employed, save for retirement through a tax-advantaged plan. For instance, you can establish a SIMPLE (Savings Incentive Match Plan for Employees) or a SEP (Simplified Employee Pension) plan with relative ease. Although there are technical differences, both plans allow you to contribute generous amounts.

The deadline for SEP contributions is your tax return due date plus extensions. The deadline to set up and contribute to a SIMPLE plan for 2006 is October 1.

6. Send the kids to day camp. You are entitled to a child care credit for the cost of caring for your children under age 13 so you and your spouse (if you are married) can be gainfully employed. The credit for taxpayers with an adjusted gross income above $43,000 is 20% of the first $3,000 of qualified expenses for one child; 20% of the first $6,000 for two or more children.

Surprisingly, the cost of sending a child to a summer day camp qualifies for the child care credit. The cost of overnight camp, however, does not qualify.

7. Maximize S corporation losses. An S corporation's losses are deductible by the shareholders up to the amount of the shareholder's basis in his or her corporate stock. If it looks like your S corporation will show a loss for the year, make sure that you have sufficient basis in your S corporation stock to take advantage of the loss deduction. You can increase your basis by adding capital to the company's coffers or lending money to the corporation.

This article outlines seven potential tax-planning ideas for the middle of the year. Don't hesitate to contact us to discuss the best strategies for your particular situation.

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	[ return to list ] Seven Tax Moves for the Summer Now that you have filed your 2005 tax return, you can relax for another year. Right? Wrong. Tax planning has become a year-round proposition. And the tax-planning moves you make—or don't make—over the summer can have a substantial impact on your 2006 tax bill. Keeping that in mind, here are seven common tax strategies to consider. 1. Examine estimated taxes. Life changes that occur during the year—a new marriage, a divorce, a new baby, a child's marriage, etc.—may affect your tax picture for 2006. If your tax payments so far this year are too low, you will have to write out a substantial check when you file your return. And you may owe an estimated tax penalty to boot. You can make up a tax shortfall through estimated tax payments or increase withholding from your paycheck for the rest of the year. 2. Avoid the “wash sale” rule. Under the wash sale rule, you cannot deduct a loss from the sale of a security if you acquire a substantially identical security within 30 days of the sale. To avoid this result, wait at least 31 days before you buy back the same security you sold at a loss. If you want to lock in your current position for a particular stock but still protect your loss, “double up” by buying the stock now and waiting at least 31 days to sell the original shares. Note: If a stock loss is disallowed due to the wash sale rule, at least you can subtract it from your basis in the stock. 3. Position investments for tax deferral. Now is a good time to review your portfolio and shift some money into investments with which you can postpone income until 2007. For example, you may want to consider Treasury bills, certificates of deposit (CDs) and other short-term investments that will not mature until next year. As a general rule, the income isn't taxable until the year it is received. 4. Salvage dependency exemptions. Although the rules for dependency exemptions have been modified, the basic thrust is still the same. You can generally claim a dependency exemption for a relative if you provide more than half of the relative's support and he or she does not have gross income exceeding the personal exemption amount ($3,300 for 2006). The “gross income” requirement does not apply to a child who is under age 19 or a full-time student under age 24. If your child is graduating this year, make sure you pass the half-support test to ensure the exemption for 2006. 5. Set up a SIMPLE or a SEP. If you are self-employed, save for retirement through a tax-advantaged plan. For instance, you can establish a SIMPLE (Savings Incentive Match Plan for Employees) or a SEP (Simplified Employee Pension) plan with relative ease. Although there are technical differences, both plans allow you to contribute generous amounts. The deadline for SEP contributions is your tax return due date plus extensions. The deadline to set up and contribute to a SIMPLE plan for 2006 is October 1. 6. Send the kids to day camp. You are entitled to a child care credit for the cost of caring for your children under age 13 so you and your spouse (if you are married) can be gainfully employed. The credit for taxpayers with an adjusted gross income above $43,000 is 20% of the first $3,000 of qualified expenses for one child; 20% of the first $6,000 for two or more children. Surprisingly, the cost of sending a child to a summer day camp qualifies for the child care credit. The cost of overnight camp, however, does not qualify. 7. Maximize S corporation losses. An S corporation's losses are deductible by the shareholders up to the amount of the shareholder's basis in his or her corporate stock. If it looks like your S corporation will show a loss for the year, make sure that you have sufficient basis in your S corporation stock to take advantage of the loss deduction. You can increase your basis by adding capital to the company's coffers or lending money to the corporation. This article outlines seven potential tax-planning ideas for the middle of the year. Don't hesitate to contact us to discuss the best strategies for your particular situation. [ return to list ]
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