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TAX TIPS FOR 2005Posted by Randy on: 2005-11-22 11:45:44 in category:
Retirement Planning News [ Print | Permalink / 0 Comment(s) ] TAX TIPS FOR 2005 Well it’s that time again. Although it’s too early to know what your taxable income will be in 2005, it’s not too late to plan strategies to lower it by any and all legal means. Whether you maximize allowable deductions and increase expenses items, the idea is to pay as little tax as possible. You might want to hold down your taxable income for 2005 by deferring income to 2006 and accelerating expenses when you have the opportunities—especially if you expect to be in a lower tax bracket next year. But you would want to do the opposite—accelerate income and defer expenses—to lift your 2005 taxable income if you expect to be in a higher bracket in 2006. Even if you expect your tax bracket to be about the same, it would be smart to consider other moves to hold down your tax bills. To determine which strategies are right for you, consider them in the sequence in which topics appear in IRS Form 1040, starting with Line 7, “Wages, salaries, tips, etc.” Reduce your salary. There is usually little that you can do about the compensation portion of your taxable income except for putting more money into a tax-deferred retirement plan: · Sign up to participate in your employer’s retirement plan (401(k), Profit Sharing Plan or TSP) if you have not already done so. · Raise the portion of compensation that you may defer into your retirement plan, if you have not already authorized your employer to withhold the maximum for this purpose ($14,000 this year, $15,000 next year). · Invest additional money in an IRA, if you meet the income requirements, so that you can deduct it on Line 25. The contribution for traditional IRA’s will be fully deductible if your income is $70,000 or less if you are married filing jointly, or $50,000 or less if filing individually. The contribution amount for a traditional IRA is $4,000 or $4,500 if you are 50 or older. Use tax-free and tax-deferred accounts: If you’re currently invested in CD’s, taxable bond funds (Government or Corporate) or individual bonds outside of tax-deferred accounts, determine whether you’d be better off in tax-free bonds or bond funds. Calculate whether your income from tax-frees would be more, or less, than your after tax return on income from taxable issues. Income from a Business. If you run a business from your home and report your receipts and expenses on Schedule C, you may also be able to deduct a portion of your home’s insurance, repairs and maintenance and utilities costs. You can report them on its Form 8829 attachment. Dividends. You may have no control over whether dividends which you receive from equity funds or stocks are classified as “ordinary” or as “qualified,” (qualified dividends are taxed at a lower rate). If you get the latter, be sure to confirm that you are differentiating these amounts on your return. A word to the wise, avoid “buying dividends” by not buying stocks or funds just before their year-end distributions. You’ll pay taxes on pent up dividend distributions, which can feel like paying taxes on part of your original investment. Capital Gains and Losses. If you want to sell individual stocks or fund shares on which you have gains and which you have owned for less than a year, you have a choice: hold them for more than a year and pay taxes at the long-term capital gains rate, or sell prior to one year and by taxed at higher ordinary income tax rates. If you own securities which are worth less than they cost, you may want to sell them in order to take a loss to offset the gains. Capital losses are netted against capital gains. Furthermore, if you don’t use all of your losses, you may carry them over to future years. If you have more realized losses than gains, you may also take an additional $3,000 of loss to offset your ordinary income. If you do sell a security to realize a loss or offset a gain, you can’t buy back that security for 30 days. Note also that you are allowed to use losses to offset the capital gains on the sale of your home as well as the sale of securities. Deductions. If you itemize deductions and you expect income to be higher next year, you may have some opportunities to defer or accelerate expenses before year end or defer expenses to 2006. Among them: medical and dental procedures, real estate tax payments due early next year and charitable contributions. Or vice versa if you are looking for deductions this year, pay for them before year end. Paying January’s mortgage payment in December will add mortgage interest to your deductions. If an individual is subject to AMT the early payment of property taxes is not effective in reducing taxable income. Tax planning is an important part of the financial planning process. Many of us will work diligently to reduce our monthly expenses to stretch our incomes, but too few of us really work at reducing our taxes. After all, it’s your money, it makes sense to keep as much of it as you can. Andy Barkate is the President of California Retirement Plans, LLC a local investment and retirement planning firm with offices in Bakersfield, Lancaster and Ridgecrest. Your questions and comments are welcome at 800-914-6837or e-mail at abarkate@calfinancial.com. |
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