As the end of the year approaches, it is a good time for you to engage in tax planning. You know your tax picture from earlier in the year and you have a pretty good idea of what it will be for the rest of the year. With that knowledge in hand, you are now in a position to take various actions that may save taxes for this year, next year, or both years.

A recent flurry of tax legislation may have an impact on your year-end tax planning for 2004. The American Jobs Creation Act of 2004 allows taxpayers who itemize their deductions to deduct state and local general sales and use taxes in 2004 and 2005, instead of deducting state and local income taxes. This option can benefit taxpayers living in or moving to states with no income tax and others, depending on their particular situations. If you live in a state without an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), and you plan to make a major non-business purchase such as a new auto toward the end of 2004, you should consider whether you would benefit more from delaying the purchase until 2005. This will generally depend on whether you will be in a higher tax bracket next year than this year. It will also depend on whether you will otherwise benefit from itemizing deductions in each year. If you would benefit from taking the standard deduction in one year and from itemizing in another year, you should make the purchase in the year you would otherwise itemize to get the full benefit of the deduction for sales and use taxes.

The Jobs Act also creates tougher deduction and substantiation rules for post-2004 charitable contributions of autos, thereby giving taxpayers an incentive to donate autos in this year rather than the next.

The Working Families Tax Relief Act of 2004 extends certain credits through 2005, keeps the child tax credit at $1,000 through 2009, and extends marriage penalty relief. A special deduction for educators who incur teaching-related expenses has been extended, too (through 2005). On the other hand, “bonus” first-year depreciation was not extended by recent tax legislation. Thus, it generally won't be available for assets bought and placed in service after 2004.

We have compiled a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply to everyone, but many clients will benefit from numerous items. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

• Increase the amount you set aside for next year in your employer's health flexible spending account so that you can get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.
• You may be able to take steps to convert investment income taxable at regular rates (e.g., interest income) into qualifying dividend income taxed at a top rate of 15%.
• It may be advantageous to try to arrange with your employer to defer your bonus until 2005.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• Business clients should consider putting new equipment in service before year-end to get a 50% bonus first-year depreciation allowance, plus regular depreciation deductions on the remaining adjusted basis. 2004 is the last year for the bonus.
• Business clients also should consider making expenditures that qualify for the $102,000 business property expensing option.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• You may be able to save taxes this year and next year by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
• Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.
• Self-employed individuals should consider setting up a self-employed retirement plan.
• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $11,000 each year to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
• If you're thinking of donating a used auto to charity, consider doing so before 2005 in order to maximize your deduction.
• Those who are contemplating marriage or divorce need to watch out for how marriage penalties could affect them. Marriage penalty relief has been extended for the 15% tax bracket and the standard deduction but other marriage penalties remain.
• Those receiving Social Security benefits should consider taking a number of steps to reduce or eliminate tax on their benefits. Workers may want to ask their employers to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).
• Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2004 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2005, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us at Cohen & Caproni, we can tailor a particular plan that will work best for you.