Year end tax planning should start in the last quarter of the year

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Year end tax planning should start in the last quarter of the year

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The last quarter of the year is always a good time to think about ways to reduce your tax burden. Here are some ideas you may wish to consider:

 

Manipulate your income—

The general rule of thumb is whenever possible defer receipt of income into the next year and accelerate the payment of tax deductible items into the current tax year.

 

Unfortunately, it is not quite that simple. You must carefully consider the impact of such actions on your Adjusted Gross Income (AGI). For example, increasing AGI can result in an increase in taxable income from Social Security payments, can reduce or eliminate the ability to make deductible IRA contributions, “phase out” itemized deductions and personal exemptions, and reduce writeoffs for medical expenses, casualty losses, charitable gifts and rental real estate losses. Bottom line, it is always best to consult with your tax advisor to determine the impact of any potential deferral of income or acceleration of deductions.

 

Retirement distribution planning—

It is generally best to put off distributions from retirement plans to avoid the pre age 59 ½ penalty tax, or if you expect to be in a lower tax bracket in future years. If you must take a pre 59 ½ distribution, you should consider taking your benefits in the form of an annuity to avoid the application of the penalty. Remember retirement plan distributions do increase AGI and could result in some negative consequences as noted above.

 

Penalty free IRA withdrawals can now be taken to pay for qualified higher educations for you, your spouse, or your child or grandchild. Additionally, IRA withdrawals can be taken to finance a first time home purchase for your and related family members without penalty. There is a $10,000 lifetime limit on withdrawals for this purpose.

 

On the job—

If you have a 401(k) plan at work, consider participating or increasing your participation. We recommend that you set aside as much as possible, but at a minimum, an amount equal to the full company match, if one is provided. The maximum contribution for 2005 is $14,000 ($18,000 if you will be age 50 or over by year end). For those participating in tax free flexible spending accounts, be advised that if you leave a balance at year end you’ll lose the money

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Alternative Minimum Tax (AMT)—

If your income is above about $75,000 and you have significant write-offs for personal exemptions, state and local income and property taxes, or interest on home equity loans, you may be the unsuspecting victim of the AMT. When it applies, the AMT is an add-on-tax over and above your regular tax amount. In effect, it is a penalty tax. If you are in the AMT, be advised that pre-paying income or property taxes or making larger charitable contributions will not help reduce your taxes this year. Again, it is important that you consult with your tax advisor before making any pre-payment of tax deductible expenses to see if they are truly going to benefit you.

 

In a nutshell, a little bit of wise planning now can make a big difference in your bottom line come tax time.

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