Pay Deductible Expenses Now
If you expect to be in a higher tax bracket or owe taxes this year, it may be more valuable to pay deductible expenses in this year rather than the next. Alternatively, if you expect your income to be higher next year, putting you into a higher tax bracket then, putting off paying deductible items until next year may reduce your tax liability. Here are some deductible expenses you can pay before year-end:
* Mortgage payments due in January can be paid in December, which includes deductible mortgage interest.
* State income taxes should be estimated and paid before year-end.
* Real estate taxes due in January, February or March can often be paid now.
* Charitable contributions you expect to make early next year can be paid this year.
Give Away Your Tax Bill
As a general rule, the market value of stock owned at least a year or more that’s donated to charity is deductible. Neither you nor the charity will pay taxes on the gain when the charity later sells it.
Also, don’t give your children cash or pay their college tuition bills with cash. Instead, give them shares of appreciated stock or funds and have them sell the shares to pay for school. The result is that the gains could be taxed at their lower capital-gains rate of 5 percent, rather than the parents’ higher 15 percent rate.
Buy Home Office Gear
If you run a business outside or in the home consider buying your computer, phone system, copier, furniture and other fixtures now. Business owners can deduct up to $105,000 of such expenses in one lump sum without stretching the cost over time. That’s especially helpful when one spouse is receiving a salary from an employer and the other’s self-employed.
Defer Income
Ask your payroll department if you’ve reached your contribution percentage or dollar limit for your company provided retirement plan for the year. If not, ask to change the contribution from your remaining pay this year (salary and bonus) if possible so you can contribute the maximum allowable into your plan. That accomplishes two things: It increases your retirement savings for this year and reduces your income reported on this year’s tax return.
Consider delaying the exercise of any more stock options until after year-end. Of course be mindful of the expiration date and be careful not to wait until then. If self employed, wait until January to send bills to your customers.
Clean Out Flexible Spending Accounts
If you’re using a flexible spending account, be careful to incur enough expenses and receipts to submit against what you deposited into the accounts. You’ll lose any unused funds in flexible savings accounts.
Now is the time to find out what your balance is and spend it on out-of-pocket health care and child-care costs. Those expenses must be incurred before the end of the year, even though the receipts can be submitted next year, to receive reimbursement from your account.
Get Tax ID Numbers
Get a Tax ID for any of your babies born in 2005. You must put your child’s social security number on your 2005 tax return, unless the child was born in the month of December. Complete IRS Form SS-5 Application for Social Security Number.
Hold Off Investing In Mutual Funds
Most mutual funds distribute taxable capital-gains distributions at year-end. Call the mutual fund and ask for the record date of the taxable distributions and invest after that date. Remember, that doesn’t apply to tax-deferred retirement accounts such as IRAs because gains aren’t taxed until you take the money out.
Also, look out for these tax traps that could snare you:
Pretax Cutbacks: Many employers are informing "highly compensated" participants in their 401(k) and flexible spending plans that, due to regulations requiring broad use of these plans by all employees, pre-tax contributions of certain employees must be reduced or cut back. In some cases, several thousand dollars must be returned and included in these individuals’ taxable income.
Received Non-Wage Income In 2005: If you received a bonus, exercised stock options, vested in restricted stock or were paid income as a contractor chances are very high you’ll end up a tax casualty. That’s because income taxes are withheld on non-wage income at 25 percent or in some cases not at all. If your tax bracket is higher (28, 33 or 35 percent) than what’s withheld, you may be in a shortfall situation.
From now until the end of the year you can make some financial moves to lower your taxes If you have any questions, please call your accountant.
Chuck Chuckuemeka is partner at Chuckuemeka & Associates of
Bloomington, Minnesota . He can be reached at [email protected] or 952-814-9292.
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About Chuck Chuckuemeka
Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.
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