|
|
|
|
| The Basics | Tax planning is a year-round game; start now
|
If you knew you could deduct more of your expenses and save more tax-free, you would, right? Well, for 2006, you can -- if you get started now. There are even a few things you can do now to reduce your 2005 taxes.
By Jeff Schnepper
Every year, Congress tinkers with the tax code. Every year, your life changes. That makes tax planning an all-year activity.
There are a few tax-saving moves you can make until April 15 that will affect your 2005 taxes The rest of your moves must be made by Dec. 31 to benefit you for 2006.
So, this brings us to my most profound advice for 2006: An aggressive tax planning strategy may be to accelerate income into the shelter of lower rates this year, especially if you can take refuge under the special 5%-to-15% rates on dividends and long-term capital gains. Heres what to think about.
Use those larger retirement deferrals
A wise man once told me that if I lived below my means, someday Id be a wealthy man. It was good advice.
Put some more money aside for retirement. Extensive changes were made to the rules relating to IRAs and qualified pension plans by the 2001 tax law.
For 2005, you still have until April 17 to make contributions that may qualify for tax breaks on your 2005 taxes. These deadlines apply to contributions to individual retirement accounts, SEP-IRAs and Keogh accounts. If you didn't establish a Keogh by Dec. 31, 2005, however, you won't be able to deduct any contributions made between now and April 17 until you file your 2006 return next year. Check with a tax pro to be sure.
Contribution limits rise again for 2005 and 2006. maximum 2005 contributions to defined contribution plans and 401(k) plans are both up $1,000 from 2004 and will rise again in 2006:
| Changes in retirement plan contributions | | Plan type | 2005 | 2006 | | | | | Defined contribution plans | $42,000 | $44,000. | | Simple IRA plans | $10,000 | $10,000 | | 401 (k) contributions | $14,000 | $15,000 | | IRA contributions | $4,000 | $4,000 |
|
Special additional contributions are now available if youre age 50 or older. Here's a rundown:
- IRA accounts. You can contribute an additional $500 (for a total of $4,500 for 2005) into an IRA and $1,000 in 2006.
- Section 401(k), 403 (b) annuities and Section 457 plans. These now allow for additional $4,000 contributions in 2005 and $5,000 in 2006.
- SIMPLE plans. If you contribute to a SIMPLE plan, you get another $2,000 for 2005 and $2,500 in 2006 once you hit the half-century mark.
Contribution limits werent the only things changed. You can now borrow from your qualified plans if youre self-employed or an employee shareholder of an S corporation. Now only loans from IRAs are prohibited.
But, consider this: Distributions from such plans will always be taxed at your highest marginal ordinary rate. Depending on your assumptions, rate of growth and age, it may be better to invest for growth outside your retirement plans.
With all of these retirement changes, youre going to need some good direction. The good news is that your employer can provide you with retirement planning advice on a tax-free basis. The bad news is that this doesnt cover tax preparation, accounting, legal or brokerage services.
Students and parents: Use your education breaks
Students and their parents make out for 2005 and 2006.
If youre single and made less than $65,000 ($130,000 on a joint return) in 2005, you can get an above-the-line college tuition deduction of as much as $4,000 in 2005 for yourself or a dependent child. Thats unchanged from 2004 but up $1,000 from 2003. If you have a college-age child, watch this provision. It expires after 2005, and Congress has not yet renewed it for 2006.
If you meet the 2005 income qualifications, you can take the Hope or Lifetime Learning tax credits, which may be even more valuable tax breaks. (A warning: You can't claim the tuition deduction and either of these tax credits.) If you file single or head of household, the credits start phasing out if your adjusted gross income (AGI) is above $43,000 and disappear if you make more than $53,000. If youre married and file jointly, the credit is phased out for incomes from $87,000 to $107,000.
Get more information on the Hope and Lifetime Learning credits here and here.
If youve graduated from college, your employer can give you as much as $5,200 per year in tax-free graduate school assistance.
The old IRA for education, now known as the Coverdell Education Account, allows tax-free withdrawals for use in grades K-12 to pay for tutoring, computer equipment, room, board, uniforms, tuition and extended-day programs. The annual contribution limit is $2,000 per child in 2005 and 2006.
Distributions from Section 529 accounts for college expenses are currently tax-free. In the past, they were taxed at the childs rate.
The Section 529 contribution limits also were raised recently. Under prior law, there was a special five-year gift tax election, which allowed you to contribute as much as $50,000 per child. In effect, you were accelerating five $10,000 per-year exclusions into a single year.
Since the annual gift tax exclusion has increased to $11,000, you can now contribute as much as $55,000 per child in a single year.
|
|
|
|
