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These 4 Last-Minute, Year-End Tax Strategies Can Save You Money
FSI Tax Corp is alerting taxpayers to year-end actions they can take to reduce their 2006 tax bills. After the New Year, it will be too late to take advantage of many tax-saving opportunities, such as reducing 2006 revenues, exploring available tax credits, and pursuing all legitimate 2006 write-offs.
1. Minimize your income
Because you are taxed on your annual income, the easiest way to lower your tax bill is to lower your income. This may not seem like a money-saving strategy, but deferring income until 2007 may reduce your taxable income for 2006.
If you have customers, you can delay your bills or extend due dates past January 1, 2007. Unless financial difficulty requires immediate funds, wait a few weeks. It will not be considered income if you do not receive it during that year, but you will still receive what is due to you. You’ll be giving your customers a much-needed break during the holidays, and your patience will be rewarded in April. If you are an employee, see if your employer can defer your vacation bonus until after New Years.
2. Tax credits
People tend to focus more on deductions than tax credits when it comes to planning for tax season. However, there are many tax credits available which, if you qualify for them, can save you a lot on your tax bill. Below is a list of tax credits; detailed explanations of each credit can be found on the IRS website.
• Retirement Savings Credit: Available to low to moderate income taxpayers who contribute to a Retirement Savings Account. This credit can save you up to $1,000 or $2,000 if you file jointly.
• Elderly or Disabled Credit: Taxpayers with limited income may qualify for this credit if they are over 65 or permanently disabled.
• Adoption tax credit: If you adopted a child this year, you may be eligible for this credit which reimburses adoption expenses up to $10,639 in 2006 or approximately $5,000 for each adopted child.
• Child Tax Credit: Low-income parents with children under 17 may be eligible.
• Child and Dependent Care Credit: This credit is for parents who have children under the age of 13 and place their children in daycare or with babysitters so that the parents can work.
• HOPE Credit: Students can claim a tax credit of up to $1,500 for tuition and financial aid.
• Lifetime Learning Credit: A credit of up to $1,000 that students (including part-time students) and out-of-school students pursuing post-secondary education or for business purposes may qualify for.
The Energy Tax Incentives Act was signed into law in August, and although critics of the law argue that it aims to provide benefits to large energy companies, it also includes tax credits for consumers. Under the new law, taxpayers can claim a credit for:
• Energy-efficient home improvements, such as insulating windows and doors.
• Solar energy equipment for residences.
• Hybrid, fuel cell and other energy efficient or alternative energy vehicles.
• Other purchases of energy equipment, such as electric heat pumps and water heaters.
In addition to delaying income and taking advantage of tax credits, overcharging deductible expenses in 2006 can also reduce your taxable income. Taxpayers should be careful to include only legitimate deductions, as each deduction will be reviewed by the IRS. Here are some ideas:
• Pay your state and local taxes in advance. If you withheld state and local taxes this year and plan to itemize, it would be beneficial to prepay the taxes now and the payment will count as a federal deduction.
• Increase your 401(k) contribution to reduce your taxes and increase your retirement savings. Some 401(k) plans allow “catch-up” contributions instead of annual contribution limits. According to SmartMoney.com, a taxpayer in the 28% tax bracket can save $280 by paying an additional $1,000. You get paid to save!
• Add additional deductible mortgage interest by paying the January mortgage bill now.
• Do not delay payment of tuition and university fees. Pay for next year’s education now and save. In some states, contributions to your 529 college savings plan may also be deducted.
4. Donate to charities
The holiday season is a “season of giving” and a great time to donate to your favorite charity. Not only does it feel good to give to those most in need, but you can help yourself by making a donation before January 1 and including the contribution on your 2006 tax return. For more information on charitable donations, visit [http://www.irs.gov/newsroom/article/0],,id=164997,00.html.
You can also donate stock to charity, avoid paying taxes on the appreciation, and deduct the full value of the stock.
For taxpayers looking for maximum generosity and time to think about how to give back, a donor-advised fund may be the answer. For a contribution of at least $10,000, you can deduct the entire amount now and distribute the funds over time.
In a word
There are plenty of ways to work the tax system in your favor, as long as you’re willing to roll up your sleeves and dig into the details. These last-minute, year-end tax tips are a good place to start.
FSI Tax Corp.
9212 Berger road
Colombia, MD 21046
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