Finance Tax Time

The word ‘taxes’ has a negative affect on people. It makes us look away, it upsets us and we make lots of grunting noises. But that’s looking at the previous year and preparing for the tax season. What about planning for 2006? Can we actually plan ahead for taxes?

Yes, it is possible. It’s important to begin our discussion on taxes by knowing what tax changes are taking affect. So I’d thought I’d get you started in the right direction. Here are some of the tax benefits coming your way in 2006 for your 2007 filings.

Standard Deduction will increase to $10,300 for married couples filing jointly, $5,150 for singles and $7,550 for heads of household.

Save more money with retirement contributions into your 401(k) or 403(b). Limits have been increased to $15,000. If you are at least age 50 before the end of 2006, you can now contribute an additional $5,000. Every little bit helps.

Estate and Gift Tax are certainly getting a gift. The exception amount increases to $2M and the maximum marginal tax rates dropped 1% to 46%.

Hybrid cars are the new ‘in’ thing and you’ll get rewarded for it too. But buy it fast to get your $2,400 tax credit. It’s only good for the first 60,000 vehicles per manufacturer.

Income Limits Increase for Deductible IRA’s. Although regular IRA and Roth contributions limit of $4,000 haven’t changed, people age 50 or older can put in another $1,000 for a total of $5,000 for the year.

Child Tax Credit will remain at $1,000 per each qualifying child. Better something than nothing.
You can put a little bigger bow on the Gift Tax Annual Exclusion package. You can now give an extra $1,000 or $12,000 for the year without filing a gift tax return.

And a little something for you. Personal exceptions have increased from $3,200 to $3,300 for the year.

So now you have it. Tax benefits that you can count on for 2006. Plan ahead and put that little extra away for those later years. When you’re retired, you can finally look behind and thank yourself for planning ahead.

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Are you paying too much in income taxes? Are you getting all the credits and deductions you are entitled to? Here are 7 tips to help you minimize taxes and keep more in your pocket:

1. Participate in company retirement plans. Every dollar you contribute will reduce your taxable income and thus your income taxes. Similarly, enroll in your company’s flexible spending account. You can set aside money for medical expenses and day care expenses. This money is “use it or lose it” so make sure you estimate well!

2. Make sure you pay in enough taxes to avoid penalties. Uncle Sam charges interest and penalties if you don’t pay in at least 90% of your current year taxes or 100% of last year’s tax liability.

3. Buy a house. The mortgage interest and real estate taxes are deductible, and may allow you to itemize other deductions such as property taxes and charitable donations.

4. Keep your house for at least two years. One of the best tax breaks available today is the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income. However, you must have owned and lived in your home for at least two years to qualify for the exclusion.

5. Time your investment sales. If your income is higher than expected, sell some of your losers to reduce taxable income. If you will be selling a mutual fund, sell before the year-end distributions to avoid taxes on the upcoming dividend or capital gain. Also, you should allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains.

6. If you’re retired, plan your retirement plan distributions carefully. If a retirement plan distribution will push you into a higher tax bracket, consider taking money out of taxable investments to keep you in the lower tax bracket. Also, pay attention to the 59-

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How many times have you done your taxes, and a week or a month later realized you forgot a deduction? The tax law is very complicated, so it’s easy to miss a deduction or two. In my experience, these are the top 5 missed deductions.

1. Non-Cash Donations

Did you clean out your closets this year? Chances are you donated those items to Goodwill or a similar non-profit organization. The value of donated items (clothing, furniture, etc.) is deductible. You will need to get a written receipt and assign a value to these items, but the tax savings are worth the effort.

2. Points on Refinancing

With interest rates so low the past few years, there have been a record-number of houses refinanced. If you refinanced, you may have paid points to get a lower interest rate. These points are deductible over the life of the new loan. In addition, if you incurred points on an old refinancing, any unamortized points are deductible in the year of the new refinancing.

3. Educator Expenses

If you’re a qualified educator (teacher, aide, instructor or principal), you can deduct up to $250 for materials you bought for the classroom. Qualified expenses include books, supplies, and computer equipment. This law is set to expire in 2006, so take advantage of it now if you qualify.

4. Investment and Tax Expenses

Expenses for tax planning and investment advice are deductible as a miscellaneous deduction, subject to the 2% Adjusted Gross Income (AGI) limitation. Expenses that qualify include tax preparation fees, safe deposit box fees, fees paid to investment advisors, legal and accounting fees related to tax planning, broker and IRA fees paid directly, investment publications, and more. Many people assume that they won’t have enough miscellaneous expenses to exceed the 2% AGI floor, but all of these expenses combined can be substantial, especially if you have unreimbursed employee expenses to add to these expenses.

5. College Savings or 529 Plan Contributions

Depending on which state you live in, contributions to 529 college savings plans may be deductible on your state income tax return. Because this deduction is only available on the state return (no deduction available on your federal return for 529 contributions), many people fail to include this deduction on their state tax return.

Kristine A. McKinley, CFP, CPA, and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis.

To sign up for free financial planning tips, worksheets, checklists and more, visit http://www.beacon-advisor.com.

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