Five Year End Strategies to Minimize Taxes
Five Year End Strategies to Minimize Taxes
Although many taxpayers get lost in the myriad of IRS forms and rules (the IRS sends out 8 billion pages of forms and instructions each year) one thing is simple to understand - you don't want to pay taxes. The good news is, the more tax deductions you take, the lower your tax liability will be.
Accelerating certain expenses before the end of the year is an easy way to take an immediate tax benefit. As long as you take action before December 31, there are many ways you can use this method to lower your tax liability.
If you itemize your deductions using a Schedule A, use the five tax strategies below will help lower your taxes and beef up your refund check from dear old Uncle Sam:
1. Charitable Contributions
Charitable contributions are not only good for the community; they are also good for your tax return. Donations of cash, personal property, and time can all be taken as charitable deductions. This includes monetary donations to a favorite charity or religious organization, clothes given to organizations such as the Junior League or Goodwill, and mileage driven for volunteer activities (currently at 14 cents per mile). If you make the donation before the end of the year, you'll reap the benefits even sooner.
While you're cleaning your house for the holidays, consider donating unused items to a local charity for a tax deduction. Donating items such as old clothing, furniture and appliances are perfect ways to lower your tax liability. If your attic is filled with junk that has not been used for years, consider donating it to charity. Taxpayers are entitled to deduct an item's fair market value, which is typically what an item can be sold for in a thrift shop.
For charitable organizations that accept credit card payments, you can charge your monetary contribution before December 31 and take the deduction, even if you don't pay the bill until next year. In addition, if you belong to a synagogue or church that collects yearly membership dues, send in your 2006 payment before the end of 2005. These membership dues are eligible for the charitable deduction.
Just remember to get and keep all receipts from organizations for your good deeds, and keep accurate records of mileage driven for charitable mileage purposes.
2. Prepay Your Mortgage Payment
Another way of accelerating expenses for an immediate deduction on your 2005 return is by prepaying your January 2006 mortgage payment. Homeowners can pick up an extra month's worth of mortgage deductions by paying this installment by December 31. The December interest charge included in the January installment is eligible for a 2005 itemized deduction if the payment is mailed by the end of this year. And in many cases, this one-month interest deduction tax savings is worth several hundred dollars.
Remember, though, that if you make this payment after your lender's 1098 is calculated, you will have to compute the additional interest yourself and add it to the amount reported on your 1098. However, this is usually easy to figure out and the savings are well worth it.
While we're on the subject of homeowner payments, you can also take another year-end tax deduction by prepaying your 2006 property taxes by December 31, 2005. This property tax prepayment is not allowed in all states, so you will need to contact your local property tax collector's office to see if you are eligible. But again, the phone call will be well worth it, since this tax deduction savings for prepaid property taxes can be substantial.
3. Auto Expenses
Operating a car is expensive, especially when this year's gas prices skyrocketed to over $3.00 per gallon. The good news is that if you use your car for business, you can deduct some of the costs of using it. And as an added incentive in the later part of 2005, the IRS raised the standard mileage rate from 40.5 cents per mile to 48.5. What does this mean for your 2005 tax return? If you use your car for business any time between September 1 and December 31 of this year, you will get the added luxury of deducting 48.5 for each recorded mile driven. This deduction is in addition to all business-related tolls and parking fees.
If keeping mileage records isn't for you, you can keep track of and deduct all of your actual business-related expenses, such as oil changes and repairs. If you use this actual expense method, you can also deduct the depreciation of your vehicle.
4. Prepay Medical Expenses
If your medical expenses exceed 7.5% of your adjusted gross income, you can accelerate 2006 payments for an immediate deduction. This means an individual with an adjusted gross income of $40,000 can deduct medical expenses above and beyond $3,000.
Prepaying your orthodontia bill or your January 1 medical insurance before December 31 is a great way to accelerate expenses. Doctors' visits and prescriptions are not the only medical expenses you can take. Any special equipment or treatments you receive are also deductible. If you have a medical condition that can be helped by a sauna or a whirlpool, those items are deductible. And like the increase in the mileage rate for business expenses, the IRS has raised the rate for computing deductible medical expenses to 22 cents a mile for trips to the doctor between September 1 and December 31, up from 15 cents for the first eight months of 2005.
Deductible medical services can be performed by someone other than your doctor. If you have a condition like a bad back and your doctor says you need a daily massage, this treatment is deductible. However, make sure you get a written note from your doctor saying you need those services.
5. Retirement Accounts
Take the time to check your 2005 contributions to your retirement plan. If you haven't made the maximum contribution, consider doing so before December 31. As much as $4,500 can be contributed to a traditional IRA if you are 50 or over and $4,000 if you are under the age of 50. If you have a company-sponsored 401(k) plan, your supplementary contribution may be matched by your employer, adding to the benefits of making additional contributions to your retirement.
If you don't think you can't afford these extra contributions, do some quick calculations. The reduction to your taxable income may actually be higher than the monies contributed.
Accelerating expenses before year-end can add thousands of dollars to your refund check from the IRS. As for all tax issues, contact your tax professional for more information on deductions, or visit the IRS Web site at www.irs.gov