Published December 2005

It’s time again to think
about year-end tax tips

Now that it’s December, you’re probably busy with family gatherings and holiday celebrations. Still, try to find some time to think about a non-holiday topic: taxes. You may have until April 17, 2006, to file your taxes, but you only have until the end of the year to make some moves that could benefit your tax situation — so you’ll need to take action soon.

Here are some suggestions to consider:

• Maximize your retirement account contributions. If you haven’t “maxed out” on your 401(k), see if your employer will allow you to make additional contributions before year-end. For 2005, you can contribute up to $14,000 (or $18,000 if you’re over 50 years old). You typically fund your 401(k) with pre-tax dollars, so, the more you contribute, the lower your taxable income.
• Donate appreciated securities to charities. If you have stocks that have appreciated greatly over the years, you might want to donate some shares to charitable organizations. Suppose, for instance, that you bought shares of XYZ stock for $250, and that they now are worth $1,000. If you were to give these shares to a charitable group, and you are in the 28 percent tax bracket, you would get a $280 tax deduction, based on the shares’ current market value. Furthermore, because you are not selling the shares, you will avoid having to pay any capital-gains taxes on your $750 profit.
• Sell your “losers.” Did any of your stocks lose value in 2005? If so, you may want to sell some of them to take the tax losses. If these losses exceeded your capital gains from selling appreciated stocks, you can deduct up to $3,000 (or $1,500 for married couples filing separately) against your other income, reducing the amount on which you must pay taxes. And if you lost more than $3,000, you can carry over the excess into subsequent years.
• Consider buying “big ticket” items now. If you are planning on buying a car, boat or other “big ticket” item, you may want to do so before the end of the year. If the total sales tax is more than your state or local income taxes, you can choose to deduct any of these taxes on your 2005 federal tax return — but this is the last year in which this benefit will be offered.
• Defer income when possible. If you’re self-employed, defer billing until late December. If you work for a company, and you’re scheduled to get a year-end bonus, see if you can put it off until January.
• Delay exercising nonqualified stock options. You will be taxed on any nonqualified stock options you exercise, so you may want to delay exercising them until next year. (Before you make this decision, though, you’ll want to evaluate the price and prospects of the stock on which you hold an option. If you hold an option too long, you will eventually be forced to exercise it; if the stock price is down at that point, you might not make much of a profit — and, in a “worst case” scenario, your option could become worthless.)

If you are unsure about which of these suggestions may be appropriate for your individual situation, see your tax adviser. But don’t wait too long — 2006 will be here before you know it.

Eric Cumley is a Certified Financial Planner and investment representative with Edward Jones in south Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 9,000 offices nationwide.

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