Year-End Tax Strategies for a Happier Return
Information courtesy of Wayne and Janet Mitchell with the H & R Block office in Scottsbluff, Nebraska,
With the year’s end fast approaching, H&R Block reminds taxpayers there’s still time to minimize your tax bill for the current year and build a strong financial base for next year. The following tips are designed to help guide you through the sometimes confusing ins and outs of year-end tax planning, but are well worth your time and energy.
>> Estimate your income and deductions: Assessing this year’s likely income against projected earnings next year is the key to making wise decisions at tax time. If it looks like you’ll make more this year than next, you may find that you’re ineligible for important credits and deductions this year. Hence, the wisest course may be to defer as much income as possible into the next year.
Conversely, if you expect to make more next year than this, you may want to report as much as possible this year in order to minimize the taxes you’ll owe next year. Balancing income between tax years sounds complicated, but it’s really just a matter of finessing deductions and credits to work to your benefit.
>> Maximize contributions to company-sponsored plans:
This is a great place for a tax break. If you have not contributed the maximum to your 401(k), find out if you can increase your contribution for the year. Your contributions are made pre-tax, which reduces your adjusted gross income and overall tax bill.
>> Postpone expenses: If you’re self-employed, you can decrease this year’s income by delaying your December invoices until January and by purchasing supplies and equipment this year instead of next. Alternately, to increase income this year, you can accelerate invoices and defer expenses until next year.
>> Consider your IRA: If you’re eligible to deduct your IRA contributions, you can make traditional IRA contributions to decrease your income this year. The maximum contribution limit is $4,000 ($5,000 for individuals age 50 and older). And you can contribute right up until April 15 to impact your 2006 return.
>> Look at your withholding: now is the time to ensure that you have enough tax withheld or have paid enough estimated tax to meet your projected obligations and, in the case of the estimated tax, to avoid a penalty for underpayment.
>> Think about a charitable gift: Donating clothing and household goods to charities before the end of the year is not only a good deed; it’s also deductible on your 2006 return. Be sure to get a receipt, and keep in mind the deduction is limited to what you could sell items for in a garage sale (their fair market value).
>> Plan your “green” deductions: The energy bill passed in 2005 contained tax breaks for individuals who purchase alternative fuel vehicles or make energy-efficient home improvements. If you purchased or leased a hybrid car or truck in 2006, you may be eligible for a tax credit ranging from $640 to $3,400. Tax breaks for installing energy efficient windows or hot water heaters are also available for improvements made in 2006 and 2007.
If you have questions about year-end tax planning, check with a tax professional. Visit the H&R Block website,
www.hrblock.com for tax and financial calculators that can help you with financial decisions all year long.