If you won’t fall into the Alternative Minimum Tax (AMT) trap this year, you should do what you can to accelerate your tax deductions into 2005 and defer income until after January 1, 2006, according to Chet Burgess, an enrolled agent who owns Brookwood Tax Service in Atlanta, Georgia.
Here are some of Burgess’ suggestions on things you can do now that will make life easier next April 15th:
Make your January mortgage payment in December, and send it in early enough that the mortgage lender will be able to post the payment in December and include it on your mortgage interest statement for 2005 (Form 1098).
Consider pre-paying property taxes due early in 2006 in December to accelerate that deduction into this year.
If you will need to make a fourth quarter estimated state tax payment, normally due by mid-January, send that payment in during December to accelerate the deduction into this year.
Income deferral is tough for many taxpayers, particularly those drawing salaries, who have little control over income receipt. Self-employed taxpayers can delay mailing invoices for work done in December until January, to push receipt of that income into 2006.
Taxpayers in 2005 again have the option of claiming EITHER state income tax paid or state sales taxes paid as itemized deductions on Schedule A. For residents of states without a state income tax, the sales tax deduction is a no-brainer. But some residents of states with income taxes may be able to claim a bigger deduction by adding up their sales tax payments – especially if they have purchased high-cost personal property such as cars, boats or airplanes during the year. Taxpayers who built or substantially remodeled a home and either acted as their own contractors or did much of the work themselves may benefit from claiming the sales tax paid on building materials. The total sales tax deduction includes an amount from IRS state sales tax tables PLUS the actual sales tax amounts paid on the major purchase items.
A great way to get a last-minute tax break and keep some dollars in your pocket that might otherwise go to the taxman is for eligible taxpayers to make or increase contributions to retirement plans. Contributions to a traditional IRA can be made as late as April 15th next year. Small business owners are allowed to fund contributions to a business retirement plan as late as the due date of their business tax return, plus extensions. A sole proprietor filing Schedule C would have until October 15th next year to completely fund a small business retirement plan such as a SEP, SIMPLE or 401(k). Note that a SEP account can be opened as late as October 15th of the following year. However, a 401(k) account to be effective for 2005 must actually be set up by December 31st of this year, and deadline to open a new SIMPLE actually passed on October 1, 2005.
The classic technique of looking for stocks and bonds with unrealized capital losses always works to help offset capital gains on appreciated securities. If you sold stock earlier in the year for a gain, look over your portfolio to see if any investments have dropped in price since you bought them. Sell enough of those investments to offset the previous capital gain, and zero out the capital gains tax you would otherwise have to pay this year. If you have unrealized capital losses that exceed this year’s gains, you can use up to $3,000 of additional losses to offset other income on your tax return. <
Donating appreciated stock can also be a tax-smart way of contributing to your favorite charity. It you have a large unrealized capital gain in a stock you have held longer than one year, you can donate the stock to a charity and claim a deduction for the current fair market value of the security. If the stock is one you believe is still a good investment, use available cash to repurchase shares of the same stock. Your new holding will have a higher basis equal to the purchase price, which can mean a savings in capital gains tax if and when you sell it sometime in the future.
If you are considering a charitable donation and have a stock with an unrealized capital loss, use the opposite technique – sell the stock and claim the capital loss, then donate the resulting cash proceeds to the charity.
Chet Burgess, EA
Brookwood Tax Service, LLC
4 Montclair Dr., NE
Atlanta, GA 30309-1527
Dec. 27, 2005.