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Tax Saving Opportunities

It is not too late to decrease your 2005 tax bill, if you act before December 31.  You might be able to take advantage of these tax saving opportunities for 2005.

• Send your January 2006 mortgage check to the lender in December so it will be processed by December 31.  You will be able to deduct the interest portion this year instead of next.
• Prepay part or all of your 2006 property taxes.
• Prepay any projected state income tax for 2005 by the end of December 2005, instead of waiting until January 15, 2006.
• Maximize your contributions to your IRA or 401(k) and 403(b) at work.  You can save $4,000 in an IRA for 2005, with a $500 catch-up contribution if you are 50 years old by the end of the year.  You can put up to $14,000 into your pre-retirement work accounts, and anyone 50 or older by December 31 can make additional “catch-up” contributions of up to $4,000.
• Make donations to charitable organizations.  Clean out your closets and donate old clothing, household items, and toys.  Non-cash contributions are deductible, but make sure you get a receipt.  If you make a cash donation with a credit card before December 31, you can deduct it on your 2005 return even if your don’t pay the credit card bill until 2006.  The [Hurricane] Katrina Emergency Tax Relief Act of 2005, allows you to deduct donations made after August 28 up to 100 percent of your adjusted gross income.
• If you have capital gains realized during 2005, consider selling investments held in non-retirement accounts that have decreased in value to offset the capital gains.  Excess losses can be used to offset up to $3,000 of wages and other income.
• Pay any medical bills if the services have been performed.  Medical and dental expenses are deductible if they exceed 7.5% of your income.
• Keep in mind that the IRS changed the per-mile reimbursement from 40.5 cents to 48.5 cents for business miles driven after September 1, 2005.

Evaluate whether you will save taxes by postponing 2005 income or deductions into 2006, or by accelerating 2006 income or deductions into 2005.  Do a quick projection to determine if it is likely you will be in a higher or a lower tax bracket next year.  If you will earn less next year, accelerate your deductions this year.  If it is likely you will earn more next year, you might want to delay the deductions unless you are moving into a higher income tax bracket where some of the credits and deductions phase out.

Careful tax planning can help you cut your tax bill for this year and the next.