As the end of the year swiftly approaches, now is a great time to visit your accountant and make sure you are poised to take advantage of the deductions and tax breaks available on your 2006 returns.
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Job No. 1 is to make sure your house is in order. “The better records you keep, the better chance the correct amount of tax will be paid," said Bill Brunson with the Internal Revenue Service. Publication 552 can help taxpayers learn how to keep detailed records. "The system only asks that you pay the correct amount. By omitting or forgetting an item, you might end up paying more tax than is required by law,” he told the Las Cruces Sun-News.
For example, Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks 2007, advises investors to be mindful of the improved stock market this year and the resulting effect on capital gains.
"For several years, many people have not realized too much in the way of capital gains distributions with mutual funds," Weltman says. Be sure to check what projected distributions might be for the year. Consider taking paper gains and losses by year-end, she told the Palm Beach Daily News.
Check your deductions. The number of cars qualified as hybrid vehicles for the Alternative Motor Vehicle Credit has been expanded for 2006. The tax credit for hybrid vehicles applies to those purchased on or after January 1, 2006, and can be as much as $3,400.
But different vehicles have different levels of credit. "Toyotas have been cut in half as of Sept. 30," Las Cruces CPA Vivian Moore said. "But anybody who took delivery before September 30 still have the benefit of full credit. After that, you can still get partial credit."
Because Congress made permanent the tax advantage of 529 savings plans, they have become more attractive. A state-run 529 plan, either prepaid tuition or an investment account, allows for college savings while permitting your child to withdraw tax-free for educational expenses. Experts say they've also become less problematic if your child needs financial aid. The 529 plan can also be beneficial for grandparents looking to get assets out of a taxable estate. Help can be found at www.savingforcollege.com.
Be sure to take advantage of charitable contribution opportunities. During 2006 and 2007, persons who are at least 70.5 years old can transfer up to $100,000 from their IRA directly to a public charity. The distribution won’t be taxed; another advantage is potentially avoiding a higher tax bracket. The key is never taking possession of the money.
Beware that you can no longer deduct an item you donate to charity unless it's of “good or better” quality, including clothes and household items. Check an item's value at the Salvation Army web site or at Goodwill Industries" site.
Take care if donating a vehicle. The IRS says if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale. To find out when a donor can claim a deduction of the vehicle's fair market value, see the IRS Guidance Explains New Rules for Vehicle Donations.
As for reducing income and therefore minimizing the tax burden in these last weeks of 2006, Moore said that you might be able to delay a year-end bonus until January if you believe that you will make less money next year. However, if you are a small-business owner, you’ll want to spend the money before year-end to get the deduction now.
Also to consider, if you want to make an extra mortgage payment this year, you have to get it in early enough to appear on the 1098 form produced by your mortgage company. You may also want to pay property tax bills in December that aren't due until January or February.
Other suggestions include funding your retirement plan. Keith Hall, CPA and tax adviser for the National Association of the Self-Employed's TaxTalk service, suggested putting as much as possible into the IRA, SIMPLE, SEP, Keogh and individual 401K savings accounts.
Hall said small-business owners and self-employed people can also make sure they’re fully taking advantage of home office write-offs and they can also hire their children. “Your dependents under age 18 can have up to $5,200 in compensation this year without paying FICA, unemployment, or Medicare taxes. Find something in your business that your children can do—maybe over the holidays—and pay them for it. You can basically get up to a $5,000 business deduction for money you're probably giving your kids anyway,” Hall told BusinessWeek.com.
The alternative minimum tax is expected to snag about 3.6 million taxpayers this year. It hits many higher-income people, especially those with many children and large state and local tax deductions. The IRS "AMT Assistant" can be found at apps.irs.gov/app/amt/index.jsp. It’s important to check your exposure, because the AMT can make some tax moves irrelevant or even counterproductive.