To print article, click Print on your browser's File menu. Go back   Get market news by e-mail See if refinancing works Personal finance bookshelf Letters from MSN Money readers Find It! Article Index Fast Answers Tools Index Site map Recent articles by Jeff Schnepper: • Got long-term stock gains and losses? Lucky you, 11/13/2005 • How many exemptions can you take?, 11/9/2005 • Relocating can save you big at tax time, 11/8/2005 More...		The Basics Last chance to save on your taxes 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. Looking for a loan? Check out MSN Money's Loan Center 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. Related news and commentary on MSN Money • Cut your income tax bill now • Write off your disaster damages • Relocating can save you big at tax time • 5 truly nasty tax surprises • Check the 2005 tax law changes 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. Capital gains and losses This year, the stock market has done what I project it will do again: It fluctuated. If you were luckier or smarter than the rest of us, you may have capital gains. If so, remember: Any net capital losses over the $3,000 allowed on your 2004 tax return should be carried forward to offset any 2005 gains. If you still have net losses, up to $3,000 may be used to offset ordinary income for 2005. If you have net long-term capital gains, theyre subject to a maximum 15% rate. If youre in the 15% or lower tax bracket, your tax hit is softened to only 5%. If youre single with taxable income of not more than $29,700, you get the 5% rate. With a standard deduction of $5,000 and a $3,200 personal exemption, you can have as much as $37,900 in gross income and still qualify. Standard capital-gains planning still applies. If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income. My general rule is to sell any losers that I wouldnt buy now at todays price. At least then I get to harvest the tax benefit of the loss. If you have shares of stock pregnant with gains and you dont expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case -- pay the maximum 15% tax. You cant go broke taking profits. But dont let the tax tail wag the economic dog. In deciding what to keep and sell, consider taxes. But remember, taxes are only one consideration. The final decision should be made on the basis of your growth expectations over your holding horizon. Enjoy lower rates on dividends Heres another reason to thank the tax gods. Not long ago, you paid a tax rate of as much as 38.6% on dividends. But now they're treated like capital gains, capped at 5% or 15%. But theres a tax trap here. Take out your calendar. To qualify for this 15% rate, you must have held the dividend-paying stock for at least 61 days. Heres a wrinkle: Those 61 days must fall between 60 days before and 60 days after the ex-dividend date. (That's the date by which you must own a stock to get the dividend. Check with the company for its ex-dividend date. If you sell shares after the ex-dividend date, you still get the dividends.) A break for business owners If you own a business, you can write off up to $105,000 in equipment expenses this year under section 179 of the tax code. This is the famous provision that allowed you to fully depreciate a vehicle that weighs more than 6,000 pounds that was purchased strictly for business -- such as an SUV or even a Humvee -- in the year you bought it. Sorry, ancient history! While you can still write off up to $105,000 in equipment expenses, your write-off for an SUV weighing less than 14,000 pounds is limited to $25,000. You only get the old cap if you bought before Oct. 22, 2004, and the vehicle weighed more than 6,000 pounds. (Read more about this here.) Some breaks to wait for The Energy Tax Incentives Act of 2005 provides three nice tax credits -- but not until 2006. Next year, homeowners can get credits for installing certain energy-saving fixtures and appliances like energy efficient refrigerators and solar water heaters. The tax break for buying hybrid vehicles will be more attractive next year, too, when current deductions are canceled and replaced with a tax credit of up to $2,000. A last trick -- and it's legal! Heres one trick Ill bet you dont know. I call it the Schnepper-Malagoli Charitable Tax Grab. Rent your home to any charitable organization during the year -- up to 14 days total -- and pay zero tax on the rental income. (Internal Revenue Code Section 280A (g), for those of you who feel compelled to look it up.) Say your church, synagogue or any recognized charity rents your home for a board meeting. They pay you $500. That money is completely tax-free. Then, without any compulsion or prearrangement, you contribute $600 to this same charity. If youre only in the 25% bracket, you save $150 in tax. The result: With the $500 tax-free rental income, youve got a total of $650 more in your pocket, less the $600 contribution, which gives you a grand total of $50 and your favorite charity $100. One meeting per month (12 is less than 14 days) and youve made $600, while the charity is up $1,200! Was it intended when Congress drafted the tax code? Clearly, no. Is it completely within the clear wording of the code? Absolutely, yes! Just because its a loophole doesnt mean you cant legally do it. And, theres nothing wrong with doing well while youre doing good.
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