Mutual Funds & Personal Finance

How To Use '05 In '06 Tax Preparation BY DONALD JAY KORN


You can organize year-end tax planning like a committee meeting. First you take up old business. Then you deal with new business.

Agenda items in both categories help you determine one of your most basic tax-prep questions: Am I going to be liable for the alternative minimum tax or regular federal tax this year? The answer dictates much of your strategy regarding accelerating or delaying income and various deductions, says Larry Torella, tax partner in the New York accounting firm Eisner LLP.

Old business can start with a look at your '05 tax return. That'll help remind you what items you reported last year and could include this year.For example, did you take miscellaneous itemized deductions? If your situation hasn't changed much, you might take them again in 2006.

Perhaps you have investment expenses. If so, consider paying for them before year-end. Send in checks for specialized investment publications and advisory services so they're postmarked by Dec. 31.

Also, see if you had a capital loss carry-forward on Schedule D. If you did, it can offset net capital gains you have in 2006.

After offsetting this year's gains, a remaining capital loss carry-forward can be deducted against your other income in 2006. This deduction can be up to $3,000.

Under new business, see if you're maximizing contributions to a tax-deductible retirement plan such as a 401(k). The 2006 limit is $15,000.

If you'll be at least 50 years old by year-end, you can add $5,000. So the maximum deduction in that age group is $20,000 this year.

Have your employer adjust your final 2006 paychecks if you want to approach or hit those caps but will not do so at your current rate.

Year-end donations to charity can cut your taxable income for 2006. You also might be able to accelerate deductions by making your January mortgage payment in early December and by prepaying estimated state income tax and property tax due in early 2007.

To Prepay Or Not?

"However, prepaying property taxes and state or local income taxes may be a waste if you're subject to the alternative minimum tax this year," Torella said. It could even push you into AMT liability.

The AMT also is a factor for medical expenses. If you think those costs will be more than 7.5% of your adjusted gross income this year, outlays beyond that level would be deductible on your regular federal income tax calculation. So pay for, say, new prescription sunglasses and schedule dental procedures by year-end.

If you'll be subject to the AMT, only medical outlays that top 10% of your AGI will be deductible.

Deferring income may be possible if you have self-employment income. Don't send out invoices until the very end of 2006 or early 2007.

Delaying billing also can work if your company uses the cash method of accounting, Torella says.

Deferring income is generally good if you expect to be liable for the same type of tax this year

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