Easing Tax Bite At Year-End

Party planning and singing verses of "Auld Lang Syne" should not be the only things crossing your mind before the year's end.

Spending some time lining up paperwork to estimate your tax bill can help set the strategy for filing taxes and saving money before the April deadline.

"People should run some numbers to find out what their (personal) deductions are," said Tom Oschsenschlager, vice president of tax for the American Institute of Certified Public Accountants.

Once you figure out what to do with the deductions, then you know what you can do with them to cut down tax liability.

Oschsenschlager said there are instances where it makes sense to accelerate your deductions when you can.

For example, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead while accelerating your deductions in order to pay less tax this year, according to the AICPA Web site.

EASE YOUR TAX LIABILITY Possible options to delay income to the following year: Defer compensation Defer year-end bonuses Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment) Postpone receipt of distributions (other than required minimum distributions) from retirement accounts To accelerate deductions into this year: Pay medical expenses in December rather than January to qualify for the medical expense deduction Prepay deductible interest Make alimony payments early Make next year's charitable contributions this year Source: AICPA

The AICPA Web site also points out that if the taxes were "significantly overpaid" and a large refund is expected, then withholding can be reduced this year, instead of waiting for a refund next year.

Oschsenschlager said that if you are close to the $10,300 limit for a 2006 standardized marriage filing jointly deduction, he advises bunching up the personal deductions -- whether it be charitable donations or deductible interest -- and take the standardized deduction the following year.

"If every year you make a charitable contribution and take the standardized deduction, if close (to reaching the standardized deduction amount), then consider bundling deductions in one year," he said.

Giving Can Help

Charitable giving can work for you to help deduct the amount you owe in taxes, but there are some things that can eat away at the deduction.

First, Oschsenschlager said people should check the Internal Revenue Service's cumulative bulletin to make sure the charitable organization is qualified so the donor can get a deduction.

He said it's fine to donate cash, but he said taxpayers have to be concerned when they get something from a charity in exchange.

For example, he gets the Smithsonian magazine and makes a $200 contribution to the organization. The Smithsonian Institution then tells him that the magazine is a $17 value, so he then deducts that subscription's price from his contribution amount declared on his taxes.

Gifting Stocks And Cars

Taxpayers can also give stock to charities tax-free.

"If people have stock that appreciates in value, it's a good opportunity to make a charitable contribution," Oschsenschlager said.

For example, he said if a person makes a $100 gain on Microsoft stock, they can give the stock to the American Cancer Society, which won't have to pay taxes because it's a charity, and the giver doesn't pay tax because they have not sold it.

"You get fair market value of what you gave the charity," he said.

Oschsenschlager said when it comes to donating cars, charities are required to report how much they received for the cars. The values of cars are taken in lots, or groups, rather than valued individually, so in most cases the charity does not get the Blue Book value for the car.

He said if the charity uses the car that is donated in an exempt function, then the donor can deduct the fair market value of the car. For example, if someone donates a car to a Meals On Wheels, an organization that needs vehicles to perform its community service, then the full value can be deducted.

Gift giving can also help step up deductions. Taxpayers may give up to $12,000 ($24,000 for a married couple) in noncharitable gifts to as many individuals as they want without incurring any gift tax consequences, according to the AICPA Web site.

If the gift is an appreciated asset, the giver will not have to pay tax on the gain and any tax is deferred until the recipient disposes of the property, the Web site says.

Timing Is Everything

When it comes to easing the tax burden with investments, timing also plays a big role.

Oschsenschlager said to look at what taxes you owe on money made with the sale of an investment. He said if you have a capital gain, and if it makes sense in your situation, you can harvest losses to offset those gains.

He said if you have a stock that is not doing well, the capital gains can be offset by those losses before the end of the year.

For example, with a stock that is losing money, you would sell it and then buy it back at a lower price. But he pointed out that you have to wait 31 days to buy it back.

“If you don't, the tax law treats it as if you never sold it,” he said.

Oschsenschlager said it's a way of keeping the same investments and offsetting a tax gain.

He warned about buying mutual funds before the year's end. He said to be very careful because mutual funds often have sizable capital gains and they are reported at a certain date, typically at the end of the year, and are disclosed in the shareholder of record.

So if the fund reports to owners of the fund on Dec. 4 about the capital gains for that fund and you bought it on Nov. 30, you might find that you have a substantial capital gains that were realized before you owned it.

Increase Retirement Funding

To reduce taxable income, the AICPA Web site recommended increasing pre-tax 401(k) contributions, which can help lower your tax bracket when you do withdraw the funds, or make either a tax-deductible contribution to a traditional Individual Retirement Account or an after-tax contribution to a Roth IRA.

With a traditional IRA, a current income tax deduction defers income and its taxation to future years, the AICPA Web site says.

With a Roth IRA, there's no current tax deduction allowed and qualifying distributions taken later will be tax free. People generally have until the due date of their federal income tax return to make these contributions, according to the AICPA Web site.

AMT An Option

Certain situations can put taxpayers into the Alternative Minimum Tax range, and it can affect your tax-planning strategy.

"It is more of a flat tax. You lose a lot of your deductions," Oschsenschlager said.

The AICPA recommends that when preparing taxes with Form 1040, you figure out the potential AMT liability with Form 6251.

According to the AICPA Web site, taxpayers can fall into AMT with items such as:

• Large numbers of personal exemptions.
• Large deductible medical expenses.
• Large deductions for state, local, personal property and real estate taxes.
• Home equity loan interest where financing is not used to buy, build or improve a home.
• Exercising a large incentive stock option.
• Large amounts of miscellaneous itemized deductions such as unreimbursed employee business expenses.

He said those who fall into the AMT situation will want to delay prepaying state and local taxes because they won't get the deduction.

Oschsenschlager said people with moderate to high incomes within high-income tax states should probably consult with a professional to see if they fall into the Alternative Minimum Tax situation.