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Take advantage of last minute tax savings
A little planning and organization can help lower your tax bill.
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There are only a few weeks left before the tax filing deadline, but you still have time to make sure you’ve done everything you can to keep your annual contribution to Uncle Sam as low as possible.
Here are some last-minute ways to reduce your personal 2005 tax bill:
Save more for retirement
One of the most important tax-saving steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plan. If you haven’t done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2005, you may put as much as $14,000 into a 401(k), 403(b) or 457 plan. If you are over age 50, you may add an additional $4,000.
Every dollar you contribute means you will pay less income tax. Except for the new Roth IRA, all contributions to tax-deferred retirement plans are tax deductible in the tax year they are contributed. If you’re in the 28% tax bracket, for every additional $100 you contribute, your federal tax bill decreases by $28. Your total savings will actually be higher when you factor in state tax savings. This is “found” money. Whatever you do, don’t walk away from it. If you can’t contribute the legal maximum, bump up your contribution as much as possible. You’ll be surprised how this can add up over time.
You must make your contributions no later than the time you file your return. You may make deposits for 2005 only in accounts that you opened prior to December 31, 2005.
Don’t forget sales taxes
Do you still have receipts for large purchases you made in 2005? You now have a choice of deducting either your state and local income taxes, or state and local sales taxes, but not both. If you live in a high-tax state such as Ohio or Massachusetts, you’re probably better off continuing to take the deduction for state income and property taxes. However, for residents of states like Florida and Texas, which have no separate income tax, the sales tax deduction can significantly reduce federal taxable income.
Can’t find your sales receipts? Not to worry. The Internal Revenue Service has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. You’ll find the tables on the IRS Web site: www.irs.gov.
Have kids in college?
If you’re dishing out big bucks for college tuition, you might be able to get some of them back. There are two education credits and a tuition deduction for which you may be eligible. A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you are allowed to deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. If you’re in the 28% bracket, your $100 deduction will reduce what you owe by $28 ($100 × 0.28).
The Hope Scholarship Credit is for taxpayers whose children (or themselves) are in their freshman or sophomore years in college. It offers a maximum tax credit of up to $1,500. The Lifetime Learning Credit offers the possibility of a credit of up to 20% of the first $10,000 in tuition you pay, for a maximum credit of $2,000.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction.
Details and earnings limitations on education deductions and credits are complex so, if you have children in college, you should check with your tax advisor to see if you are eligible.
And don’t forget the $1,000 Child Tax Credit, originally scheduled to drop to $700 this year. It has now been extended through 2010.
| Plan now for 2006 |
| The best way to pare your personal and business income taxes to the legal minimum is to avoid the last minute rush to beat the filing deadline. Here are a few tips that will help you minimize taxes for 2006. Organize your records Maximize your tax-deferred retirement account early Home equity interest Balance investment gains and losses For Your Information: |
Often overlooked deductions
Many easily overlooked miscellaneous expenses are deductible as long as they add up to at least 2% of your adjusted gross income (AGI). Grouping them together can help you meet the 2% threshold. Here are some miscellaneous items that you may have overlooked:
Tax preparation costs
You may claim the cost of personal income tax preparation software or books as a miscellaneous deduction. If you hire a professional tax preparer to do your taxes, you may also be able to deduct the fee.
If applicable, you should make sure that you take full advantage of the following IRS-approved deductions:
Interest from home refinancing
If you used today’s low-interest environment to refinance a mortgage and still have unamortized points left to deduct from an earlier refinancing, you can claim all the unamortized points from the earlier refinancing as deductible interest.
Don’t forget that new baby
You must obtain a social security number for babies born during 2005 and put it on your tax return in order to receive the benefits of claiming the child as a dependent or claiming head of household status.
Purchases financed by loans or credit cards
If you made large purchases on your credit card or with a loan, don’t forget to deduct any interest costs involved.
Use caution when taking advantage of miscellaneous deductions. Document everything. If the IRS decides to question you about any of your deductions, they will want to see all of your pertinent receipts and statements.
Check your math, especially subtractions, and be sure to get the correct tax amount from the tax table if you use it. The other numbers to be most careful about are the identification numbers – usually Social Security numbers – for each person listed on the return.
The IRS toll-free help line (800-829-1040) is available on weekdays from 7:00 a.m. to 10:00 p.m. Their Web site has interactive tax aids, forms and publications for downloading and links to e-filing partners.
If you are unable to complete your return on time, you may request an automatic extension to August 15. Form 4868 has details, including various options for getting an extension by filing or paying electronically. There is also a special toll-free number for requesting an extension by phone – call 888-796-1074 by the regular filing deadline.
An extension gives extra time for filing only, not for paying any balance due. Interest will apply to any tax not paid by the April deadline, plus a late payment penalty if less than 90% of the total tax is paid on time.
When you mail your return, be sure to get it to your local post office before the last pickup of the day. Some post offices stay open late to accept returns for a deadline day postmark. You may also use one of the designated private delivery services to meet the filing deadline. The four companies involved – Airborne Express, DHL Worldwide Express, Federal Express and United Parcel Service – can provide details on which of their services qualify and how to get proof of timely filing.
Keeping your personal income tax to the legal minimum requires a little planning and effort on your part, but the time you spend chipping away at your taxes may be among the most profitable investments you’ll make this year.
For Your Information:
- William J. Lynott is a retired management consultant and corporate executive who writes on business and financial topics for a variety of trade and consumer publications. You can reach him at lynott@verizon.net or through his Web site: www.blynott.com.