Published December 2005

More ways to save money
on your tax return

By Mary Decker
Guest Columnist

While you’re planning your holiday gatherings, it’s also the right time to be thinking about income taxes. Many opportunities disappear after Dec. 31, so it’s worthwhile to review your tax situation before year end. Here’s a list of things you can do to keep that tax bill down.

1. Retirement plan contributions: You can’t beat a deduction for money you pay to yourself. Take advantage of the company 401(k) or set up an IRA account if you don’t already have one. Work with your tax adviser to determine the best plan for you.

2. Required minimum distributions: If you’re over 70-1/2, you must take a certain amount out of your retirement account every year, based on the value of the account at the end of last year and an IRS table. You will save yourself from a 50 percent penalty by doing so.

3. Capital losses: If you have capital gains this year, the tax bill could be a big concern. Consider selling stocks with paper losses. The loss offsets the gain and reduces your capital-gains tax. If you like the stock, you can buy it back after 31 days. Capital losses also can offset ordinary income up to $3,000.

4. Gifts: Consider gifting mutual-fund shares to family members in a lower tax bracket before the year-end dividend is declared.

5. Small business expensing election: For furniture, fixtures and equipment placed in service by Dec. 31, the business could write off up to $105,000 on purchases up to $420,000.

6. Charitable contributions: Tax relief provisions enacted as part of aid for Hurricane Katrina victims include an increased limit on charitable contributions (up to 100 percent of adjusted gross income) to public charities.

7. More charitable contributions: Clean house and donate your noncash items. Keep a list of what you gave and estimate its “thrift shop” value. Get a receipt.

8. Energy incentives: Consider buying alternative fuel (electric and hybrid) vehicles before year-end. Make sure the model qualifies for the credit or deduction before purchase.

9. Sales tax: You can use your actual receipts or the IRS table amount. In addition to the table, you can take sales tax on certain “big ticket” items. Caution: Taxes are nondeductible for alternative minimum tax (AMT), so if you are subject to AMT, last-minute purchases won’t be of any help.

10. Bunching deductions: For medical expenses and miscellaneous itemized deductions, the percentage “floor” can keep you from getting much benefit. Pay as much as possible before year end in order to get over the percentage limitations.

For year-end tax planning, all you need to do is sort through your records and run a projection of your tax liability vs. your payments. Get help from your tax adviser if your situation is complex. Even if you don’t do anything differently, just knowing where you stand can give you peace of mind for the holidays — and the tax season afterward.

Mary T. Decker, a shareholder with Hascal, Sjoholm & Co., PS in Everett, is a Certified Public Accountant and a Certified Financial Planner. She can be reached at 425-252-3173 or by e-mail to maryd@hascal.com.

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