| It's Year-end Tax Planning Time. . . Again |
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There is still time to lower your 2006 tax bill and add to your tax-advantaged retirement accounts. Here are a few ideas to get you started.
Make the Standard Deduction Work for You. If your itemized deductions are just at or below the standard deduction (currently $10,300 for joint filers and $5,150 for singles), they don't generate any tax benefit for you. However, you can bunch itemized deductions into a single tax year to take full advantage of them and exceed the standard deduction that year. Then you can take the standard deduction the following year. Following this two-year pattern results in greater deductions overall. Deductions that work well for this strategy include charitable contributions, property taxes, the fourth quarter estimated state income tax payment, and your January mortgage payment.
Consider Giving Appreciated Securities to Your Children. A great way to reduce the tax hit on an appreciated security is to give it your child (or grandchild). The child can hold the security until the year he or she turns 18 and then sell it without being subject to the "kiddie tax." Assuming the current tax rate structure is left in place, the resulting capital gain will probably be taxed at only 5% if the stock is sold this year or next. If sold in 2008 through 2010, the tax rate will likely be 0%. Remember, your child's lower tax rates won't apply if the stock is sold before the year he or she turns 18. Also, giving the security to your child (or grandchild) is considered a gift. However, you can use your annual $12,000 gift tax exclusion to shelter the transaction from any gift tax.
Consider Selling Appreciated Securities. It may be a good time to consider selling capital assets (e.g., common stock) with a low cost basis. The maximum capital gains tax rate is 15% for gains from the sale of qualifying assets held more than one year. The 15% maximum tax rate is available for both the regular and alternative minimum tax (AMT). In addition, qualifying dividends individuals receive during 2006 will generally be taxed at the 15% (or less) capital gains rate.
Year-end Tax Planning
Sell Losers with Tax Savings in Mind. It's also important to consider the best time to trigger capital losses by selling losers held in your taxable investment accounts. Capital losses are used to offset any capital gains for the year. If total losses exceed total gains, the excess can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
Contribute to Your IRA. You can contribute up to $4,000 ($5,000 if you are age 50 or older by year-end) to your IRA in 2006 if certain conditions are met. For married couples, the combined contribution limits are $8,000 ($4,000 each) and $10,000 ($5,000 each if both are age 50 by year-end) when a joint return is filed provided one or both spouses had at least that much earned income. And keep in mind that contributions to traditional IRAs may be tax deductible subject to specific limitations.
Contribute to Your Employer-sponsored Retirement Plan. The 2006 annual deferral limit for qualified retirement plans is $15,000. If you are at least age 50 by year-end, you can contribute an additional $5,000 to 401(k), 403(b), and 457 plans in 2006. These contributions normally decrease your taxable income.
Purchase Equipment for Your Business and Use Section 179 Expensing. For your business, the Section 179 (election to expense otherwise depreciable assets) limit is $108,000 for eligible property placed in service during 2006 and includes qualifying property placed in service as late as December 31, 2006. However, the Section 179 deduction phases out, dollar-for-dollar, after eligible equipment purchases reach $430,000. So, the $108,000 deduction amount for 2006 is completely phased-out when eligible equipment purchases reach $538,000.
Business Owners can Set up a Retirement Plan. If your business doesn't offer a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you generally can contribute up to 20% of your self-employment earnings, with a maximum contribution of $44,000. A SIMPLE-IRA, on the other hand, allows you to set aside up to $10,000 plus an employer match that could potentially be the same amount. In addition, if you're age 50 or older by year-end, you can contribute an additional $2,500 to a SIMPLE-IRA.
Please contact us with questions or concerns about tax saving strategies for yourself, your family, or your business.
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