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| The Basics | Last chance to save on your taxes
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Get your ducks in a row right now and claim these 2005 tax breaks before the new year -- and new rules -- begin.
By Jeff Schnepper
It's crunch time for trimming down your 2005 tax bill. If you miss making these tax moves by Dec. 31, you can't get the tax breaks back.
Tax planning is a touch more complicated this year because Congress changed the tax laws again -- with the Katrina Emergency Tax Relief Act of 2005, and the Energy Tax Incentives Act of 2005.
Both laws mean possible tax savings for you. So don't delay, and don't ignore them. Heres what you need to know -- and what to watch out for.
Old tricks that still pay
Lets start with the easy ways to cut your tax bill:
Maximize your pension or IRA contributions. Unless tax rates shoot up, you want to pay your tax tomorrow rather than today.
Make your 2005 charitable donations by Dec. 31. If ever there was a year to make charitable contributions, it's 2005. Normally, charitable contributions are limited to 50% of your adjusted gross income and are subject to an overall itemized deduction limit. However, all charitable contributions relief are excluded from both these rules. But, if you don't make them by Dec. 31, youll lose the tax break.
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You can charge a contribution on a credit card and still get the deduction. And this is good to know: If you did a lot of driving for Katrina relief, you can deduct up to 70% of the current business allowance. Since Sept. 1, 2005, thats 70% of 48.5 cents, or 34 cents per mile.
Make those big gifts now. If you might be subject to the estate tax, make your $11,000 gift- and estate-tax-free gifts before the end of the year. The annual exclusion increases to $12,000 for 2006.
Use up your flexible spending account (FSA) dollars. If you dont, youll lose the money. New for this year: You may be able to use expenses up through March 15, 2006 to absorb your 2005 balance. (Check with your employer; it's at their discretion.) You can even pay for nonprescription drugs through an FSA. In addition, your employer can give you a debit card for your FSA spending. That eliminates a whole lot of paperwork keeping track of purchases.
Make your Jan. 1, 2006, mortgage payment on Dec. 31. Remember to add the extra interest paid to what your lender reports on its Form 1098. The lender will get your payment in 2006 and wont report it for 2005, but because you wrote the check in 2005, it adds to your deduction this year.
Pay real-estate taxes early. If you pay your own real-estate taxes, make any payments due in the beginning of 2006 by Dec. 31. My fourth-quarter real-estate tax is due on Feb. 1, 2006. By paying on Dec. 31, I get the deduction a year earlier.
Contribute to a retirement plan. If youre contributing to a retirement plan such as a 401(k) or a 403(b) plan, you can put in $14,000 this year. If youre 50 or older, you can put in another $4,000 as a catch-up contribution. Check with your employer to be sure you can make extra contributions.
Medical and miscellaneous expenses. Both medical expenses and miscellaneous itemized deductions have floors. For medical expenses, only those in excess of 7.5% of your adjusted gross income (AGI) count. Miscellaneous itemized expenses must exceed 2% of your AGI. The planning strategy here is to bunch. If youre going to exceed the floor, accelerate your expenses. For example, prepay your orthodontist or your tax preparer. Mail your checks on Dec. 31 so theyre received by and are taxable to the payees in 2006. Alternatively, if youre not going to exceed those floors, defer the deductions to 2006. You may exceed your floors then.
The new sales-tax option
Again this year, you can deduct either your state income tax or sales tax, whichever is greater. The Internal Revenue Service will provide sales-tax tables in its Publication 600 (.pdf file). You can add any tax paid on cars and boats to the table amounts. Or you can deduct the actual state and local sales tax paid -- if you can substantiate that amount. Start finding and saving those receipts!
This is a great deduction for those in the seven states with no income taxes -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- and in states with low income-tax rates, such as Tennessee.
But watch out for the Alternative Minimum Tax (AMT). The sales-tax deduction increases your potential exposure to this horror. The good news: Unless Congress extends the sales-tax provision, it'll disappear after 2005.
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